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Must losing taxes on saving be harmful?

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Internationalization offers enhanced opportunities for individuals to place savingsabroad and evade domestic saving taxation. This paper asks whether the concomi-tant loss of saving taxation necessarily is harmful. To this end we construct a modelof many symmetric countries in which public goods are financed by taxes on savingand investment. There is international cross-ownership of firms, and countries areassumed to be unable to tax away pure profits. Countries then face an incentiveto impose a rather high investment tax also borne by foreigners. In this setting,the loss of the saving tax instrument on account of international tax evasion mayprevent the overall saving-investment tax wedge from becoming too high, and hencemay be beneficial for moderate preferences for public goods. A world with 'high-spending' governments, in contrast, is made worse off by the loss of saving taxes,and hence stands to gain from international cooperation to restore saving taxation.JEL-Classifcation: H87, H21Keywords: Capital income taxation, cross-ownership, coordination

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Harry Huizinga, Søren Bo Nielsen

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