Capital taxation with open borders

Since 1975, both corporate income tax rates and top marginal income tax rates have been lowered in most OECD countries. A common explanation of this phenomenon is that increased international capital mobility reduced the ability of governments to tax income from capital. In this paper, we examine the constraints on the taxation of income from capital with free capital mobility. We demonstrate that capital mobility increases the constraints on the taxation of income from capital only when investors expect future taxes to rise. As long as taxes are stable, governments using the right tax instruments can collect substantial taxes on uninvested profits without affecting private investment whether capital is mobile or not. We conclude that increased capital mobility is not a compelling explanation of the reduction in tax rates that has occurred in the past fifteen years.