Capital Controls in Direct Democracies
This paper analyzes the determinants of capital controls in direct democracies. Without loss of generality, the instrument of capital control is assumed to be a tax on earnings from foreign investments. Within the premises of the MacDougall-Kemp model, it is shown that for every individual factor endowment there is a unique optimal tax rate. In a direct democracy the median voter’s optimal tax is adopted since preferences regarding the tax rate are single peaked. It turns out that large open economies restrict capital exports more heavily than small economies.
In the Specific-Factors model with internationally mobile but sector specific capital, results are less clear-cut. Capital controls alter the rewards of the specific factors in the same direction but to a different extent. Whereas, wage rates are shifted in the opposite direction. The result of majority voting not only depends on factor ownership distribution for the different industries, but also on their characteristics such as labor intensity, the distributive share of labor in production, or the relative size of the industries in terms of the individuals owing the specific factor of that industry.
KeywordsMedian Voter Small Open Economy Income Share Direct Democracy Factor Endowment
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