Taxation and the external wealth of nations: Evidence from bilateral portfolio holdings

This paper examines the impact of capital income taxation on the composition of foreign portfolio investment and on long-term external wealth. Using data on bilateral portfolio positions for a sample of 37 countries over the period 2001–2017, we find that capital gains and dividend taxation reduce the share of equities in foreign investments, while interest taxation increases this share. To examine the potential effects of capital income tax reform on long-term external wealth, we simulate tax reforms in which each country replaces its actual capital income tax rates by the average tax rates in the sample. We find that the external wealth effects of such reforms can be very substantial, with estimates ranging from +8.5% for Japan to −10% for New Zealand.