International organizations, such as the Organization for Economic Co-Operation and Development (OECD) and the European Community (EC), have promoted, to varying degrees, the liberalization of capital movements among their member countries.' The Code of Liberalization of Capital Movements, an agreement drawn in 1982 by the OECD, sets different degrees of capital liberalization among its member countries, depending on the nature of capital transactions (e.g., direct or portfolio investment). The Treaty of Rome (1957) recommended, among other things, the liberalization of capital movements among the EC countries (Chapter IV, articles 67-72). By and large, capital movements in the EC have been liberalized since 1990. The remaining restrictions in the capital markets of some member countries, such as Greece, Ireland, Portugal, and Spain, were to be eliminated by the end of 1992.2 These developments in the world capital markets have prompted a renewed interest among trade theorists regarding the response of key economic variables (e.g., national income, employment and welfare) to the liberalization of capital movements. With capital becoming more mobile internationally, capital flows in a country depend, among other things, on the domestic and the foreign capital tax rate, and on the prevailing system of taxing net repatriated capital earnings in the capital-exporting countries. Frequently, capitalexporting countries tax the net repatriated capital earnings according to a system (i) of tax credits, under which tax payments by foreign capital invested in a capital-importing country are credited toward its tax liability to the source capital-exporting country,3 (ii) of tax deductions, under which
Read full abstract