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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 15-2004:
Must losing taxes on saving be harmful?

Harry Huizinga and Søren Bo Nielsen

Abstract: Internationalization offers enhanced opportunities for individuals to place savings abroad and evade domestic saving taxation. This paper asks whether the concomi- tant loss of saving taxation necessarily is harmful. To this end we construct a model of many symmetric countries in which public goods are financed by taxes on saving and investment. There is international cross-ownership of firms, and countries are assumed to be unable to tax away pure profits. Countries then face an incentive to impose a rather high investment tax also borne by foreigners. In this setting, the loss of the saving tax instrument on account of international tax evasion may prevent the overall saving-investment tax wedge from becoming too high, and hence may be beneficial for moderate preferences for public goods. A world with 'high-spending' governments, in contrast, is made worse off by the loss of saving taxes,and hence stands to gain from international cooperation to restore saving taxation.

Keywords: Capital income taxation; cross-ownership; coordination; (follow links to similar papers)

JEL-Codes: H21; H87; (follow links to similar papers)

29 pages, May 5, 2004

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