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Neutrality has been a dominant theme in scholarly and policy debates on international taxation for fifty years. This paper questions whether the concept of tax neutrality is adequately specified for analyzing the efficiency properties of international tax systems. As distinct from the closed economy setting, in the open economy setting, tax incentive effects include the redirection of both capital and tax revenues from one jurisdiction to another. Because tax revenues finance infrastructure and other productivity-enhancing goods – so-called “tax amenities” – and because capital burdens infrastructure, one consequence of the reallocation of tax revenues and assets is the adjustment of non-tax-affected rates of return in both home and host jurisdictions. As a result, what are viewed as tax incentive effects, or distortions, improve productivity in some cases. Neutrality as a value, however, rests on the idea that tax incentive effects reduce efficiency by causing resources to be allocated away from some optimum non-tax-affected baseline; this idea is what justifies referring to tax-influenced allocations as distortions. The implication of the argument is that the baseline is normatively arbitrary in the open-economy setting.

The paper suggests that in light of these considerations, an analysis focusing on the allocative, distributive and competitive properties of international taxrules would be more helpful than one focused on their neutrality properties. In this spirit, a simple model relating tax revenue and population to productivity is offered.



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