Tax Policy and Present-Biased Preferences: Paternalism under International Capital Mobility

This paper deals with tax-policy responses to quasi-hyperbolic discounting. Earlier research on optimal paternalism typically abstracts from capital mobility. If capital is mobile between countries, it may no longer be possible for national governments to control domestic savings via capital taxation (as in a closed economy). In this paper, we take a broad perspective on public policy responses to self-control problems by showing how these responses vary (i) between closed and open economies, (ii) between small open and large open economies, and (iii) depending on whether or not both source based and residence based capital taxes can be used.