Taxation of Foreign Capital and the Optimun Tariff

Abstract

Given that the host country has the monopoly power in the exportable market, this paper has been concerned with the optimum tariffs in a specific model where the internationally mobile capital is specific to the import-competing sector. The distinctive feature of this paper is approaching the optimal trade policies as an illustration of the theory of second-best. The second-best tariff rate depends on the given rate of tax on foreign capital yields. When the tax on foreign investment is greater (smaller) than the optimum rate, a tariff greater (smaller) than the traditional formula is required to correct the distortion and restore the equilibrium.