WHY IS CAPITAL SO IMMOBILE INTERNATIONALLY - POSSIBLE EXPLANATIONS AND IMPLICATIONS FOR CAPITAL INCOME TAXATION

The evidence on international capital immobility is extensive, includi ng the lack of international portfolio diversification real interest d ifferentials across countries, and the high correlation between domest ic savings and investment. We develop a model with asymmetric informat ion between countries that helps rationalize all the above observation s and then examine the implications of this model for optimal domestic tax policy. Without asymmetric information past work showed that smal l open economies should not impose corporate income taxes. With asymme tric information, the optimal policy instead involves government subsi dies to capital imports. Some omitted factors that argue against subsi dizing capital imports are explored briefly.