Taxes and the global allocation of capital

Despite enormous growth in international capital flows, capital-output ratios continue to exhibit substantial heterogeneity across countries. We explore the possibility that taxes, particularly corporate taxes, are a significant source of this heterogeneity. The evidence is mixed. Tax rates computed from tax revenue are inversely correlated with capitaloutput ratios, as we might expect. However, effective tax rates constructed from official tax rates show little relation to capital—or to revenue-based tax measures. The stark difference between these two tax measures remains an open issue. r 2008 Published by Elsevier B.V.