explaining business cycles in small open economies abstract this paper analyzes the role of world price shocks fluctuations in the prices of capital intermediate and primary goods and in the world real interest rate in the generation and propagation of business cycles in small open developing countries i construct a stochastic dynamic multi sector small open economy model the model is a variant of the specific factors model and reflects the major structural characteristics of developing economies i utilize variance decomposition methods to quantitatively evaluate the impact of world price shocks the results indicate that world price shocks account for a significant fraction of business cycle variability in developing countries

taxation of outbound direct investment economic principles and tax policy considerations this paper reviews economic principles for optimality of the taxation of international profit from both a global and national perspective it argues that for traditional systems based on the residence of the investor or the source of the income nothing less than full harmonisation across countries can achieve global optimality the conditions for national optimality are more difficult to identify but are most likely to imply source based taxation however source based taxation requires an allocation of the profits of multinational companies to individual jurisdictions this is not only very difficult in practice but in some cases is without any conceptual foundation the taxation of interest income on a residence basis is also hard to justify if the aim of the tax system is to tax only the income arising from economic activity in a given country

optimality properties of alternative systems of taxation of foreign capital income foreign source capital income taxes are examined from the point of view of optimal taxation in the framework of a simple economy with international real capital flows a taxonomy of alternative systems of such taxation is first presented showing how crediting and other tax parameters induce what are called source based residence based and related systems next tax rates are determined that are optimal from a single country s point of view given those of the others the achievability of these rates under the various systems is analyzed finally tax rates that are optimal from an international point of view are considered again achievability of an international optimum under the various systems is considered leading to the main conclusions that i a pure residence based system in all countries can achieve an international fiscal optimum ii it cannot however be sustained as an equilibrium

public good differentiation and the intensity of tax competition we show that in a setting where tax competition promotes efficiency variation in the extent to which firms can use public goods to reduce costs brings about a reduction in the intensity of tax competition this in turn brings about a loss of efficiency in this environment a minimum tax counters the reduction in the intensity of tax competition thereby enhancing efficiency split the difference tax harmonization also potentially enhances efficiency but would not be agreed upon by governments because it lowers the payoff to at least one of them this paper also presents an explanation for how traditionally high tax countries have continued to set taxes at a relatively high rate even as markets have become more integrated

nash and stackelberg solutions in a differential game model of capitalism abstract this paper examines two noncooperative open loop solution concepts in a simple model of economic growth and distribution formulated as a differential game between workers who may save or consume and capitalists who may consume or invest it is demonstrated that both players prefer the stackelberg game to the nash game furthermore it is shown that under fairly realistic assumptions about the parameters of the model both workers and capitalists would prefer to act as the follower in the stackelberg game this means that capitalism is in a stalemate i e in a position where neither class wants to take the initiative and announce its strategy first the result is interpreted as an explanation of the difficulties met in designing and implementing incomes policies and social contracts

budgetary policy and unemployment dynamics in an olg model with collective bargaining we consider a dynamic general equilibrium model with capital accumulation and collective wage bargaining and investigate how unemployment responds to structural shocks under two stylised budgetary policies under balanced budgets tax adjustments lead to higher unemployment on impact but enable a quick recovery of employment by contrast unbalanced budgets mitigate unemployment effects on impact but dynamics are more persistent due to weaker capital accumulation and future fiscal consolidations these results are consistent with empirical evidence on a positive cross country relationship between government borrowing and unemployment persistence this paper starts out from the well known fact that many european countries have suffered from persistently high unemployment over the past two decades there is a large literature which attempts to explain this development as resulting from a combination of structural shocks and mechanisms which make the effects of any such shifts more persistent one prominent branch of this literature stresses that adverse structural shocks tend to induce a slowdown in capital accumulation which reinforces the employment losses and adds to unemployment persistence bean 1989 benassy 1997 blanchard 1997 burda 1988 caballero and hammour 1998 daveri and tabellini 2000 similarly these studies point out that when the shock is over the recovery of employment depends critically on the speed with which investments in capital respond to the new situation the purpose of this paper is to reconsider this capital shortage hypothesis by linking it explicitly to the stance of fiscal policy to see the importance of fiscal policy in this context consider a government which faces an adverse structural shock such as a drop in employment due to a wage setting shock and decides whether it should keep its budget balanced or not this decision will affect the overall structure of assets in the economy i e the mix between capital and government bonds and this mix will in turn be an important determinant of the speed with which the economy can create employment once the shock is over in particular according to the capital shortage hypothesis the recovery in terms of employment is likely to take longer under a policy which temporarily accepts structural budget deficits particularly when crowding out effects have been substantial

on the dominance of capitalists leadership in a feedback stackelberg solution of a differential game model of capitalism abstract this paper deals with a modified version of the lancaster model of capitalism where it is assumed that there is a cost jointly borne by the two groups of players workers versus capitalists and associated with the bargaining of a larger share of consumption for the workers it is shown that a feedback stackelberg solution with the capitalists acting as leaders and announcing their investment policy at the beginning of each period is a solution dominating the feedback nash solution the paper is also intended to be a tutorial on the feedback stackelberg solution a concept not so often used by economic modelers

efficient equilibria in a differential game of capitalism abstract one considers a differential game of capitalism a la lancaster feedback nash equilibria and pareto optimal solutions are characterized under the assumption that the planning horizon is infinite it is then shown that by combining a pareto optimal solution with the nash feedback equilibrium strategy pair which plays the role of a threat one can obtain an efficient equilibrium which is also subgame perfect in the sense of selten this result modifies sensibly the previous interpretation of the inherent inefficiency of capitalism

strategic behaviour and the rules for international taxation of capital this paper examines the welfare of a capital exporting or source country and a capital importing or host country under tax credit and tax deduction systems for the international taxation of capital because the two tax systems may create quite different strategic incentives for the countries the authors compare the equilibria in the tax setting game played by the two countries under each system they find that the tax credits system introduces an antitrade bias into the equilibrium contrary to initial impressions and that both capital exporting and capital importing countries will prefer the tax deductions scheme to tax credits copyright 1989 by royal economic society

competition in interregional taxation the case of western coal markets for many products are dominated by small group of states or countries with a natural advantage in the marketplace because of some initial endowment of resources favorable climate or location the purpose of this paper is to explore how such markets involving a few political jurisdictions interact noncooperatively we examine how such a market might be structured and operate and the extent of monopoly rent that can be extracted in the absence of collusion we answer these questions for an empirically estimated model of western u s coal in which two states montana and wyoming dominate production we demonstrate that in this market the amount of rent that can be extracted is greatly reduced through competition relative to a cartel nevertheless even with two producing states competing against each other significant rents can be captured significant enough to refute the contention that little rent can accrue without a cartel

identifying terms of trade shocks in a developing country using a sign restrictions approach using annual data for botswana from 1960 to 2012 we examine the responses of macroeconomic variables to four generalized positive terms of trade shocks global demand globalizing sector specifi

taxing foreign profits with international mergers and acquisitions a large part of border crossing investment takes the form of international mergers and acquisitions in this article we ask how optimal repatriation tax systems look like in a world where investment involves a change of ownership instead of a reallocation of real capital we find that the standard results of international taxation do not carry over to the case of international mergers and acquisitions the deduction system is no longer optimal from a national perspective and the foreign tax credit system fails to ensure global optimality the tax exemption system is optimal if ownership advantage is a public good within the multinational firm however the cross border cash flow tax system dominates the exemption system in terms of optimality properties

why do countries combine the exemption system for the taxation of foreign profits with domestic double taxation relief many european countries exempt foreign profits from domestic corporate taxation at the shareholder level however all corporate profits are taxed and double taxation relief is granted only for domestic corporate taxes this paper attempts to rationalize this tax policy in the presence of double taxation agreements which exempt foreign profits from domestic corporate taxation countries may use shareholder taxes to tax these profits the disadvantage of shareholder taxes is that they create incentives to sell domestic firms to foreigners but double taxation relief for domestic profits may preserve domestic ownership our results imply that national dividend tax policies may be a factor contributing to the empirically observed home bias in investment

capital income and profit taxation with foreign ownership of firms abstract this paper establishes optimal rules for capital income and profits taxation in the open economy with or without foreign ownership of domestic 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

simple rules for the optimal taxation of international capital income in this paper we reconcile and extend previous results on the collectively optimal taxation of international investment income the weighted average rule of horst 1980 for example is shown to rest on unattractive assumptions on the set of instruments available ruling out any need for distorting taxes the principal contribution is to establish a new and strikingly simple weighted average rule encompassing the other key result in this area for the general case in which lump sum taxes are unavailable the ability to tax pure profits is perhaps restricted and distorting taxes on both domestic and border crossing capital income are optimally deployed

the taxing task of taxing transnationals financial and real investment flexibility tax competition and superior economic information by transnationals both create a rationale for corporate income taxation and limit the effectiveness of such taxation while these factors have led to a variety of transnational tax policies such as deferral double taxation apportionment and trade rules very few of these institutional features have been integrated into tax competition and agency models in this paper i show how the integration of investment flexibility tax competition and agency issues is crucial to our understanding of corporate tax policies

will social welfare expenditures survive tax competition increasing economic openness creates demands for social welfare programmes designed to cushion the impact of economic changes but may also encourage governments to reduce tax rates to attract mobile economic resources competitive tax reductions could then prevent governments from being able to finance significant welfare spending alternatively economic globalization might improve the ability of governments to afford social welfare programmes and several considerations point in this direction first taxes on internationally mobile activity represent only small fractions of total revenue collections personal income taxes value added taxes and social insurance contributions finance most social welfare spending second international competition need not reduce taxes and indeed over the past 25 years corporate tax collections have remained high as fractions of gdp and total taxes third the vitality of a country s economy largely determines its level of social spending to the extent that incomes rise as a result greater economic openness should strengthen provision of social welfare copyright 2006 oxford university press

must losing taxes on saving be harmful abstract internationalization offers enhanced opportunities for individuals to place savings abroad and evade domestic saving taxation this paper asks whether the concomitant loss of saving taxation necessarily is harmful to this end we construct a model of many symmetric countries in which public goods are financed by taxes on saving and investment there is international cross ownership of firms and countries are assumed to be unable to tax away pure profits countries then face an incentive to impose a rather high investment tax also borne by foreigners in this setting the loss of the saving tax instrument on account of international tax evasion may prevent the overall saving investment tax wedge from becoming too high and hence may be beneficial for moderate preferences for public goods

energy taxation reasons for discriminating in favor of the production sector abstract if a small open economy wishes to restrict it s greenhouse gas emissions it has to decide whether to impose uniform taxes on all polluters or to resort to a discriminatory policy in practice countries tend to impose higher taxes on households and to tax the industrial sector more leniently this paper identifies conditions under which this is efficient it is shown that an efficiency maximizing tax planner discriminates in favor of the production sector if i there are restrictions on the taxation of lump sum income or if ii labor supply exerts market power

tax evasion in an open economy abstract ignoring tax evasion possibilities a value added and a cash flow income tax have similar behavioral and distributional consequences yet the available means of tax evasion under each can be very different under a vat avoidance occurs through cross border shopping whereas under an income tax it can occur through shifting taxable income abroad given evasion we show that a country would make use of both taxes in order to minimize the efficiency costs of evasion activity relying relatively more on whichever tax is harder to evade we then make use of aggregate danish tax and accounting data from 1992 to measure the amount of evasion that occurred under the two taxes while the estimates of evasion activity are small the figures imply that denmark could reduce the real costs of evasion activity by relying more on value added taxes

can capital income taxes survive in open economies optimal tax theory forecasts that small open economies should not tax capital income yet countries do tax capital income why the inconsistency this paper shows that use of the double taxation convention whereby governments credit taxes paid abroad against domestic taxes helps explain this inconsistency in particular capital income will be taxed if a dominant capital exporter acts as a stackelberg leader when setting its tax policy due to the convention other countries will then tax capital imports making it attractive for the dominant capital exporter to tax capital income without a dominant capital exporter however the model still forecasts no capital income taxes can taxation of capital income survive the increasing integration of world capital markets a number of recent papers suggest not diamond and mirrlees 1971 for example showed that a small open economy would not choose to tax the income generated by the physical capital located within the country this is because production would occur efficiently under an optimal tax system which requires that domestic investments earn the rate of return available on the world capital market in principle a country might still attempt to tax income earned on the savings of its residents however in practice income from savings invested outside the country is virtually impossible for a government to monitor individuals therefore can evade tax on such savings with very little risk as razin and sadka 1989 show such capital flight in theory eliminates any possibility of a tax on savings investors will simply transfer their funds abroad to avoid taxation yet virtually all countries do in fact tax the capital income earned by corporations and individuals located within their borders how can the theoretical forecast of no capital income taxation be reconciled with this simple observation it is difficult to use existing models with any confidence to analyze the implications of changes in capital income tax rates if these same models forecast that countries should never tax capital income

commodity tax competition between member states of a federation equilibrium and efficiency we first describe regional market equilibria whereupon consumers of each region allocate their purchases of private goods between domestic and nondomestic ones according to the structure of relative prices taxes and transportation costs next regional optimal tax levels and public good quantities are derived the tax of the other region being held constant fiscal competition arises from the ability of one region in choosing its tax to alter the tax base of the other

tax incentives for business investment a primer for policy makers in developing countries abstract the use of tax incentives is widespread even though the available empirical evidence on the cost effectiveness of such incentives in stimulating investment is highly inconclusive this paper is primarily intended as a primer on the use of tax incentives for policy makers especially those in developing countries it discusses the objectives cost effectiveness and transparency of implementing tax incentives assesses the comparative merits of alternative forms of such incentives and provides a review of the empirical literature its main conclusions are that the justification for the use of tax incentives should be limited to the rectification of market failures and that the preferred form of tax incentives are those that provide for faster recovery of investment costs

the oecd model tax treaty tax competition and two way capital flows model tax treaties do not require tax rate coordination but do require that either credits or exemptions be applied to repatriated earnings this contradicts recent models with a single capital exporter where deductions are most efficient i incorporate the fact that capital flows are typically bilateral with symmetric countries credits by both is the unique and efficient treaty equilibrium this equilibrium weakly dominates the nontreaty equilibrium with asymmetric countries the treaty need not offer improvements without tax harmonization with harmonization it is always possible to reach efficient capital allocations while increasing both countries welfares only if neither uses deductions

terms of trade shocks in africa are they short lived or long lived abstract this paper examines the persistence of shocks to the terms of trade using annual data on 42 sub saharan african countries for the period 1960 96 instead of using unit root tests to distinguish between stationary and random walk processes for the terms of trade this paper characterizes the persistence of shocks using point and interval estimates of the half lives of terms of trade shocks using median unbiased mu estimation techniques that remove the downward bias of standard least squares ls estimators we find that the cross country average of the half lives of terms of trade shocks is about 6 years it is also found that the estimated persistence of african terms of trade shocks varies widely for about one half of the countries their half lives are short lived less than 4 years while for one third of the countries their half lives are long lived permanent the majority of african countries are found to have terms of trade that typically experience finitely persistent transitory shocks which is consistent with the reversion of terms of trade to their long run trends

african terms of trade and the commodity terms of trade close cousins or distant relatives this paper examines whether there is a relationship between the commodity terms of trade the price of primary commodities relative to the price of manufactures and the net barter terms of trade of 42 sub saharan african countries for most countries there is little evidence of a stable long run relationship between the two terms of trade series accordingly the practice in the literature of proxying for movements in any given country s terms of trade by using an aggregate index of relative commodity prices is inappropriate and is likely to engender misleading policy conclusions

designing tax policy in federalist economies an overview abstract the emerging economic federations of the european union russia and south africa along with the established federations in australia canada and the united states confront the task of designing the institutions for federal fiscal policy this paper reviews the literature on the design of tax policy in federalist economies we conclude that taxation by lower level governments can lead to significant economic inefficiencies and inequities the usual assignment view of federalis recommends central government policies for example resident based taxation or grants in aid to correct these failures these recommendations assume that the central government will act as a benevolent social planner the political economy view of federalism suggests that this assumption is in error and that additional federalist institutions must be considered alternative legislative structures and constitutional rules are considered

the terms of trade the real exchange rate and economic fluctuations this paper examines the relationship between terms of trade and business cycles using a three sector intertemporal equilibrium model and a large multicountry database results show that terms of trade shocks account for nearly one half of actual gdp variability the model explains weak correlations between net exports and terms of trade the harberger laursen and metzler effect and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity terms of trade shocks cause real appreciations and positive interest differentials although productivity shocks have opposite effects the puzzle that welfare gains of international asset trading are negligible is left unresolved copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

tax competition and tax coordination in an optimum income tax model abstract the paper uses the self selection approach of stiglitz 1982 to study tax competition and tax coordination in a many country optimum income tax model in the model the government can impose a non linear tax schedule on wage income and a source based tax on mobile capital in an uncoordinated equilibrium it turns out that countries can use the capital tax instrument to weaken the self selection constraint the paper presents examples where positive and negative capital taxes are optimal from a single country perspective if the production function is weakly separable between labor and capital it can be shown that the optimal capital tax is zero the paper also shows that contrary to the standard tax competition model the uncoordinated equilibrium can be efficient if the wealth distribution the endowments with capital among individuals is egalitarian a coordination of capital taxes does not affect welfare for non egalitarian wealth distributions a coordinated increase in capital taxes can raise or lower welfare depending on the redistributive impact of a higher capital tax

strategic trade policy through the tax system if conventional instruments of strategic trade policy are unavailable the system of foreign profit taxation and transfer price guidelines may serve as surrogate policy instruments in this paper i consider a model where firms from two countries compete with each other on a market in a third country both firms have affiliates in the third country where part of the production takes place i analyse optimal policy choices of the firms residence countries aiming at strategically manipulating the competitiveness of their firms i show that first countries prefer the tax exemption system over the tax credit system if there is no intra firm trade second if the headquarters provide inputs for production in the affiliate countries prefer the tax exemption system if the transfer price for these inputs is close to the headquarters variable cost and if the residence country s tax rate is high however if transfer prices are high and the residence country s tax rate is low i show that the tax credit system is an optimal tax policy choice for both countries from a policy perspective the view that the tax exemption system is generally the best policy response if domestic firms competitiveness is a policy goal has to be qualified

capital accumulation and income distribution as the outcome of a dynamic game abstract this paper presents a model of an economy with two representative agents a capitalist and a worker who play an infinite horizon dynamic game about income distribution we consider three types of equilibria which correspond to joint price taking walrasian equilibrium and to wage setting by either the capitalist capitalistic equilibrium or the worker laborist equilibrium for the last two of them an inefficient feedback stackelberg solution is first analyzed afterwards we apply a version of the folk theorem and obtain a wide range of sustainable efficient equilibria one of which coincides with the nash bargaining solution

international profit shifting within multinationals a multi country perspective abstract we model the opportunities and incentives generated by international tax differences for international profit shifting by multinationals the model considers not only profit shifting arising from international tax differences between affiliates and parent companies but also from tax differences between affiliates in different host countries our model yields the prediction that a multinational s profit shifting in a country depends on a weighted average of international tax rate differences between all countries where the multinational is active using a unique dataset containing detailed firm level information on the parent companies and subsidiaries of european multinationals and information about the international tax system we test our model and empirically examine the extent of intra european profit shifting by european multinationals on average we find a semi elasticity of reported profits with respect to the top statutory tax rate of 1 3 while shifting costs are estimated to be 0 6 of the tax base international profit shifting leads to a substantial redistribution of national corporate tax revenues many european nations appear to gain revenues from profit shifting by multinationals largely at the expense of germany

fiscal competition and the pattern of public spending much attention has been given to the impact of fiscal competition on the level of public expenditure but relatively little to the impact on its composition using a broadly familiar and reasonably rich model of fiscal competition in the presence of mobile capital this paper establishes a systematic bias in public spending patterns starting from the non cooperative equilibrium and holding tax rates constant welfare would be improved by a coordinated reduction in the provision of local public inputs and a corresponding increase in the public provision of local public goods benefiting immobile consumers c 1997 elsevier science s a