Stock index futures: implications for international capital taxation

Abstract

This paper develops a model of corporate capital structure and investor portfolio choice in an international setting. The model's key feature is the stock index futures contract. Investors and companies specialize in securities based on tax and currency appreciation rates. Despite this specialization, investors achieve complete diversification through futures positions. Nations should tax interest and capital gains equally and should not tax corporate income. This contrasts with the result when futures do not exist, in which foreigners' desire for diversification provides countries with an incentive to use tax policy to reduce foreign ownership of domestic equity to acquire monopoly rents.