Can Direct and Indirect Taxes Be Added for International Comparisons of Competitiveness?
While it is usually argued that direct and indirect taxes should be added for meaningful
international comparisons of country competitiveness, this paper argues that the opposite
may be true. It is possible that a country with a high value-added tax needs a high capital
income tax to maintain its international competitiveness and vice verca. Which view is
correct depends on which combination of the origin, destination, source and residence
principles' prevail and whether or not accelerated depreciation is allowed. Using a
Heckscher-Ohlin model with international capital movements the paper studies the
relevant alternatives in detail.
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