Optimal tax and tariff policies with tax credits |
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Authors: | Eric W Bond |
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Institution: | The Pennsylvania State University, University Park, PA 16802, USA |
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Abstract: | This paper examines the optimal tax and tariff policies for a small open economy when mobile capital receives a tax credit for taxes paid to the host country. For a capital-importing country, a tax on capital equal to the source country tax rate (to capture tax revenue) combined with a subsidy to encourage capital imports is the optimal policy. Results are also derived for cases in which only one of the instruments can be varied. For a capital-exporting country that cannot reduce its capital tax rate, a subsidy to the sector using exported capital is desirable. |
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