International Taxation When Domestic Distributional Policy is Constrained

International capital trade benefits a nation as a whole but the gains from trade are unevenly distributed among owners of various factors. The traditional view in international taxation is that a small economy should not tax capital trade. However, this view is valid only if the government is free to choose domestic distributional policy. This paper investigates what constitutes optimal international tax policy when domestic distributional policy is constrained at a minimum rate. The finding is that taxing capital trade could be welfare-improving. [F21, H21, H24]