Abstract

Interest Yield Taxation and International Interest Rate Differentials

Globalized financial flows have led to an evolving worldwide capital market. Traditional domestic markets are thus losing the character of autonomous markets. The analysis discusses what qualitative effects emanate from taxes on interest income and from the deductibility for tax purposes of interest paid on national interest rate levels and rates of exchange when capital market are completely liberalized and open. The effects of different country-specific tax bases and tax rates, taxation according to the nominal value principle and possibilities of tax avoidance are subjected to a close review. The concepts presented lead to the conclusion that countries with relatively high rates of inflation will – when applying the principle of nominal value taxation – record in the long term a lower level of real interest rates after tax than countries with an average low of money value erosion. This cannot even be prevented by taxation systems that are internationally fully harmonized. Whilst it is possible to avoid this distorting effect by taxing real interest income only, a further interest rate-distorting influence is much more difficult to contain. For, it is demonstrated how possibilities of tax avoidance lead to a bias in the taxation system as regards the interest rate level, total savings and the volume of investments.