Three essays on taxation in an open economy

Due to increasing degree of integration in international capital market, taxation on capital income should be considered in an open economy. The first essay deals with the issues related to capital market integration, tax competition and tax coordination of heterogeneous countries in a two-country OG model. When international capital flows are allowed, there can be tax competition between countries, which lower the welfare of both countries. Tax competition can arise under the residence principle as well as under the source principle. When there is tax competition, tax coordination between countries can be Pareto improving. Capital market integration of heterogeneous countries can be Pareto improving if it is accompanied by a proper fiscal policy coordination. The second essay considers uncertainty in the tax rate on capital income and its relation to international capital mobility and tax systems. Assuming uncertainty in the tax rate arises due to political struggle of two types of people desiring different fiscal policies, the essay shows it has a negative effect on the welfare. When international capital flows are allowed, the size of uncertainty and its welfare cost depend on the tax system of the country. The same degree of uncertainty causes a larger welfare cost in an open economy, especially under the source principle. However, the welfare cost due to uncertainty in the tax rate can be smaller in an open economy because uncertainty in the tax rate is smaller. The third essay studies optimal tax on foreign direct investment (FDI) income in a two-country model. By employing a model in which FDI arises due to industrial-organization reasons, it shows results different from those of previous studies based on the cost-of-capital approach. In an equilibrium, the source country taxes FDI income, but offers foreign tax credit. The host country taxes the income of foreign corporations at the same rate as that of domestic corporations. The essay shows that the current tax treatment of FDI income in the U.S. and many other countries is optimal