Should Foreign Capital Be Taxed for Fiscal Expansion?

Fung, Michael Ka-yiu; Zeng, Jinli

doi:1997.12.3.388

The Journal of Economic Integration 1997 September;12(3) :388-401.
DOI: https://doi.org/10.11130/jei.1997.12.3.388

Should Foreign Capital Be Taxed for Fiscal Expansion?

Michael Ka-yiu Fung, Jinli Zeng,

The Chinese University of Hong Kong
The National University of Singapore

ABSTRACT

This paper studies the income distribution implications of a fiscal expansion financed by foreign capital in a small open economy. Utilizing a multi-sector general equilibrium model, four results are derived for a stable equilibrium: (1) domestic private agents' welfare may be reduced by fiscal expansion even if agents do not finance the expansion; (2) the fiscal authority's welfare may be reduced by fiscal expansion even if more resources are allocated for the authority's consumption; (3) the after-tax rental income of the foreign capital's owners may be increased even if they finance the fiscal expansion; and (4) fiscal spending may be contractionary for domestic residents (private agents and fiscal authority) even if the spending is financed by non-residents. (JEL Classification: F20, H30)

REFERENCE

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2.	Devereux, M. [1988], "Non-traded Goods and the International Transmission of Fiscal Policy," Canadian Journal of Economics 21; pp. 265-278.