Variable labour supply, taxes, employment and welfare under various rules of international taxation of capital

Abstract

This paper develops a general equilibrium trade model to examine for a small capital-importing and a small capital-exporting country the employment and welfare effects of capital and wage taxes. The supply of capital is variable due to international mobility, while the supply of labour is variable due to endogenous supply adjustments. The paper considers the optimal policy toward one factor when the other is taxed, under three tax systems of repatriated capital earnings - (1) tax credits, (2) tax deductions, and (3) untaxed net repatriated capital earnings. The analysis also determines under which of these tax systems the employment and welfare effects of domestic factor taxes depend on the foreign capital tax rate, and under which ones they do not.