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I show that in economies with risk sharing frictions and aggregate
demand externalities, home capital gains should be taxed at a higher
rate than foreign capital gains. The differential tax rate, serving a
novel Pigovian role, corrects distorted portfolios and promotes macroeconomic
stability. This result provides a stark contrast to standard
arguments claiming that capital income from all sources should be
taxed at the same rate (e.g. Gordon and Hines (2002)). Moreover, I argue
that a constant differential capital tax can complement a generally
time-varying capital control policy. Finally, I show that tax changes can
take the form of beggar-thy-neighbor policies even when the amount
of capital in each country is fixed and a country cannot manipulate its
terms of trade.
- Other
