Capital Flight and Tax Competition: Are There Viable Solutions to Both Problems?
James R. Hines, Jr.
This paper discusses a model corporate tax system based on the
application of the residence principle. This tax system, while preserving
national sovereignties, minimizes the distortions froa international capital
mobility. The paper is motivated by an analysis of European capital income
tax systems, and of the distortions they might give rise to as obstacles to
international capital flows diminish. The alternative system we analyze has
two main properties: it exploits the territoriality of law enforcement, and
allows countries to set the corporate tax rate - and the extent of double
taxation of corporate income - independently from their partners. The paper
concludes with some suggestive evidence of the potential revenue effects among
European countries of this tax system.
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