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Capital Income and Profits Taxation with Foreign Ownerwhip of Firms.

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Abstract

This paper establishes in the simplest possible way optimal rules for capital income and profits taxation in the open economy with or without foreign ownership of doemstic firms. We show that if there are constraints on the feasibility of profits taxation, both saving and investment taxes generally enter the optimal tax package. If instead profits can be fully taxed, then source-based investment taxes vanish. If domestic firms are in part owned by foreigners, then source-based investment taxes can be used to shift income away from these to domestic citizens and they may even be used to finance lump sum transfers to domestic residents.

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