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.