The international transmission of tax shocks are analyzed in a two‐country infinite‐horizon representative agent framework. the viability of the tax regimes, arising from the arbitrage conditions characterizing equilibrium in a perfect world capital market, is emphasized. Conditions for both short‐run and long‐run viability are derived, and the two polar regimes of source‐based and residence‐based taxation are discussed. In general, the former is found more likely to satisfy the viability conditions than the latter. With equity financing, the long‐run viability of residence‐based taxation is likely to require the harmonization of tax and/or dividend policy. the main features of the dynamic adjustment paths following a tax increase are characterized.