Source-based versus residence-based capital income taxes in a dynamic model

This paper compares source and residence-based capital income taxes in the steady state of a dynamic two-country model. Contrary to the results in the literature, it shows that the source-based tax performs better than the residence-based tax does in the sense that the welfare costs of tax competition are smaller. This is due to the facts that the steady-state conditions determine the tax bases and that the residence-based tax distort savings more than the source-based tax does.