Strategic Behaviour and the Rules for International Taxation of Capital

This paper examines the welfare of a capital exporting or source country and a capital importing or host country under tax credit and tax deduction systems for the international taxation of capital. Because the two tax systems may create quite different strategic incentives for the countries, the authors compare the equilibria in the tax-setting game played by the two countries under each system. They find that the tax credits system introduces an antitrade bias into the equilibrium, contrary to initial impressions, and that both capital exporting and capital importing countries will prefer the tax-deductions scheme to tax credits. Copyright 1989 by Royal Economic Society.