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The role of the corporate income tax in distorting capital investment and savings decisions has been investigated at length in the academic literature. While much progress has been made in understanding the behavioral implications of the tax, the recent literature has increasingly raised questions regarding why such taxes continue to exist. For example, Gordon (1986) and R ain and Sadka (1991) argued that a small open economy should not impose a source-based tax such as a corporate income tax on capital income. If capital is mobile and the country is a price-taker in the world capital market, capital cannot bear the incidence of the tax. Firms would continue to locate in the country only if other factor prices (primarily for land and labor) drop by enough to compensate firms for the higher amount they have to generate before tax so as to be able to provide capital owners the going rate of return after tax. But if these …