International Investment, Taxes, and Welfare

Document Type

Article

Publication Date

3-1-1989

Identifier/URL

40781924 (Pure)

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Abstract

This paper extends the Kemp-Jones model of international trade and investment to include consumption and production taxes in addition to investment and trade taxes. The generalized model is employed to examine the effects of capital flows in the presence of a given set of taxes, of foreign ownership in the absence of ongoing capital movements, as well as to derive the optimal policy. Among the more noteworthy results are (i) immiserizing foreign investment could occur even when tariff is absent, (ii) perverse welfare effects could be experienced by a country which has resources employed abroad, and (iii) optimal policy generally requires no fewer than three independent instruments.

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