International Differences in Capital Taxation and Corporate Borrowing Behavior: Evidence from the U.S. Withholding Tax
Leslie E. Papke
Securities transactions in the U.S. climbed on a net basis from
$19 billion in 1983 to $50 billion in 1985. This rise was due almost
entirely to an increase in foreign purchases of U.S. securities - largely
corporate and government bonds. One reason suggested for this phenomenon
is foreign investors' perception that the U.S. is a safe haven: there are
strong investment fundamentals in the U.S. relative to other industrialized
countries. Moreover, since the summer of 1984, these instruments have been
free from withholding tax on interest paid to foreign holders of notes and
bonds issued by U.S. entities.
Recently, there has been discussion of re-imposing the withholding
tax. A common counter argument to re-imposition is that such a tax is
notoriously ineffective at raising revenue. As evidence, opponents point
to the U.S. experience with the now-repealed withholding tax on the
interest earned by foreigners. This paper explains the reasons that the
tax was ineffectual. It is essentially a case study of the earlier U.S.
experience with a withholding tax. In particular, the paper focuses on
corporate borrowing behavior during the tenure of the tax and the change
which took place after repeal.
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