International Capital Mobility and Tax Evasion

This paper studies the welfare effects of international investment to evade domestic taxes on domestic investment income. Capital mobility for tax evasion eliminates distortions in the intertemporal allocation of consumption, but introduces distortions in domestic production. Conversely, a regime where residents pay taxes on all investment income, domestic and foreign, introduces distortions in intertemporal consumption allocation, but leaves domestic production distortion-free. The relative magnitude of the interest elasticity of savings and the interest elasticity of domestic investment determines the welfare effects of capital movements for the purpose of tax evasion.