The Economic and Welfare Effects of Taxing Foreign Assets

Ed W.M.T. Westerhout

No 94-03, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: This paper develops a two-country portfolio model to analyse the portfolio-composition, interest-rate and welfare effects of taxing foreign equity. Taxes reduce or increase trade in financial assets, depending on the type of taxation. The same goes for the effects of taxes on the differential between the expected rate of return on equity and the interest rate on bonds. In contrast, welfare effects are unambiguous. In the case of perfect as well as that of imperfect substitution of domestic and foreign goods, it is optimal to leave foreign equity untaxed.

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