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The integration of world capital markets carries important implications for the design and impact of tax policies. This paper evaluates research findings on international taxation, drawing attention to connections and inconsistencies between theoretical and empirical observations.

Diamond and Mirrlees, 1971a, Diamond and Mirrlees, 1971b note that small open economies incur very high costs in attempting to tax the returns to local capital investment, since local factors bear the burden of such taxes in the form of productive inefficiencies. Richman (1963) argues that countries may simultaneously want to tax the worldwide capital income of domestic residents, implying that any taxes paid to foreign governments should be merely deductible from domestic taxable income.

Governments do not adopt policies that are consistent with these forecasts. Corporate income is taxed at high rates by wealthy countries, and most …