Capital Taxation and External Accounts in a Small Growing Economy

The effects of capital taxation on external accounts depend on how government allocates the tax revenue. With government debt being endogenous, an increase in either the residential or territorial capital tax rate may decrease net foreign asset holdings. With intergenerational transfers being endogenous, an increase in either the residential or territorial capital tax rate may increase net foreign asset holdings. With government spending being endogenous, an increase in the residential capital tax rate may either deteriorate or have no effect on the external accounts.