Liberalization of the International Capital Markets: Effects on Taxation, Cost of Public Funds and Income Redistribution

International-capital market integration has become a key policy issue in the prospective integration of Europe of 1992. In this context this paper provides a theoretical analysis of the effects of relaxing restrictions on the international flow of capital on the fiscal branch of government: the optimal provision of public goods, the structure of taxation and income redistribution policies. The major findings are: (a) income from investment abroad should be taxed at the same rate as income from domestic sources; (b) the cost of public funds falls and the supply of public goods rises if restrictions on international capital flows are relaxed; and (c) the amount of income redistributions, specifically the value of the demogrant, increases with the international-capital market liberalization