The Optimal Taxation of Risky Return to Foreign Investment.

This paper analyzes state-contingent taxation of the return to foreign investment in a country. It is assumed that the investment will be undertaken only if the investor obtains a given expected utility from the project. The optimal tax schedule across income levels in different states is characterized in cases where private domestic income is exogenous and in the case of endogenous domestic taxation. In the latter case, the striking results are obtained that the total tax revenue should always increase when total income increases and it makes no difference for the rate of increase whether it is domestic or foreign income that increases. Copyright 1995 by The London School of Economics and Political Science.