Capital Flows: The Case of the United States and Japan

The internationalization of financial markets has contributed to the growing interdependence of the world’s economies. In particular, policy or other shocks that affect domestic savings-investment balances may set in motion large international capital flows. Accordingly, policymakers increasingly recognize that their macroeconomic policies may have important interna-tional ramifications. Tax rules, especially those regarding the taxation of capital income, poten-tially have powerful effects on savings-investment balances and, therefore, on external current accounts and international capital flows. Moreover, the inte-gration of financial markets has made tax rules more powerful in affecting the global allocation of investment and savings, thereby potentially distorting the worldwide allocation of resources. Thus, with the capital markets of the major industrial countries now much more integrated, changes in the structure of capital income taxes in one country can have major implications for other countries by affecting international capital flows and global efficiency. Thi