Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2001:5: Mitigating Double Taxation in an Open Economy

Tobias Lindhe
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Tobias Lindhe: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: The interaction of various methods of mitigating economic and international double taxation of corporate source income is studied within a standard neoclassical model of firm behavior. The main purpose is to determine to what extent methods effective in mitigating economic double taxation in a closed economy remain useful in an open economy where the firm's marginal investor is a foreigner. While a cut in the statutory corporate tax rate invariably reduces the cost of capital, the impact of the imputation and split rate systems is shown to depend on whether the credit or exemption method is used in mitigating international double taxation, and the precise design of these methods.

Keywords: Corporate taxation; double taxation; cost of capital; open economy

JEL-codes: G32; H25; H32

22 pages, February 1, 2001

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