Implications of introducing withholding taxes on foreigners' interest income

This paper explores efficiency and equity issues related to the introduc-tion of a withholding tax on foreigners ' interest income from their in-vestments in the U.S. Because of existing treaty obligations and tax-avoidance options, the effective tax rate of any practicable withholding tax is likely to be considerably below its statutory rate. A statutory 30 percent U.S. withholding tax on portfolio interest, if not accompanied by similar (retaliatory) tax measures introduced by foreign governments, appears to yield aggregate domestic welfare gains. The gains are at-tributable to U.S. financial market power stemming from the large share represented by the U.S. of world financial transactions and from the imperfect substitutability between U.S. and foreign securities in port