This paper analyzes optimal capital taxation in open economies with strategic interaction in a neo-classical growth model. With a territorial or source-based tax system, I show that optimal capital taxes in steady state are zero for a large open economy, thereby generalizing the result previously established only for the special cases of a closed and a small open economy. If the steady-state assumption is relaxed, optimal capital taxes are still zero when marginal utilities of private and public consumption are bounded, or when the utility function is quasi-linear in consumption. Moreover, in the latter case the solution is also time-consistent. For the residential or world-wide tax principle, however, countries are not able to tax all factors of production, so capital income taxes are generally non-zero except in the limiting cases of a closed or small open economy. Allowing for both residential and territorial taxes restores zero capital taxes.

Additional Metadata
Keywords Dynamic Optimal Taxation, Open Economy, Ramsey Taxation, Capital Taxes
Publisher Department of Economics
Series Carleton Economic Papers
Citation
Gross, T. (2013). Dynamic Optimal Taxation in Open Economies (No. CEP 13-06). Carleton Economic Papers. Department of Economics.