Tax Policy and International Competitiveness

This paper examines the interactions between tax policy, international capitol mobility, and international competitiveness. It demonstrates that tax policies which stimulate national investment without affecting national savings must inevitably lead to deterioration in a country's trade balance in the short and intermediate run. This conclusion, which contradicts a great deal of popular rhetoric highlights the importance of considering the macroeconomic as well as the microeconomic aspects of tax changes. Yore generally, the effects of tax policies depend critically on the extent of the international capital flows which they generate. The paper examines the issue of international capital mobility both theoretically and empirically. A variety of considerations suggest that while tax policies could generate large capital flows, governments pursue policies which tend to inhibit capital flows following tax changes. This makes the analysis of tax policies difficult.