Capital taxation with open borders

Introduction The central dilemma of social democratic thought today concerns the promise and the threat of freer markets. In the social democratic view, markets are mechanisms that simultaneously generate an efficient allocation of resources and an inegalitarian distribution of rewards. Of course, market outcomes are efficient only under restrictive conditions that rule out externalities, significant increasing returns to scale, monopoly power, and so forth. Nevertheless, the current consensus on the advantages of freer markets in ever-broader realms that encompasses most of the political spectrum from Right to Left belies the qualifications of economic theory. It is relatively easy for parties without egalitarian commitments to embrace policies of market liberalization. Social democrats are more conflicted. In order to reap the efficiency gains that markets make possible, must social democrats abandon their traditional commitment to mitigating the inequalities of wealth and income that markets engender? This paper addresses this general question in the context of the taxation of income from capital and the liberalization of financial markets. The increased international integration of financial markets is commonly perceived as one of the most important changes in the world economy over the past twenty years. Exports and imports of capital have grown at twice the rate of trade in goods since 1980. During the past decade, financial markets have been liberalized in Japan, Italy, France, New Zealand, Norway, Sweden and Denmark, i.e. in most of the advanced industrial societies that had significant regulatory controls over capital flows (OECD, 1989).