THE SEESAW PRINCIPLE IN INTERNATIONAL TAX POLICY

The standard analysis of the optimal international tax policy of a sma ll country typically assumes that the country either imports or export s capital, but does not do both. This paper considers the situation in which a small country both exports and imports capital and can alter its tax on one or the other, but not both. In each case, a ''seesaw'' relationship is identified, in which the optimal tax on the income fro m capital exports (imports) is inversely related to the given tax rate on income from capital imports (exports). The standard results for op timal taxation of capital exports and imports are shown to be special cases of the more general seesaw principle. (C) 1997 Elsevier Science S.A.