How to promote capital account liberalization while preventing financial crises is a challenging task for policymakers.This study proposes a nonlinear (progressive)capital flow tax as a solution.We first demonstrate that the collateral requirement of intational borrowing can give rise to multiple equilibria and self-fulfilling financial crises.We then show that the crisis equilibrium characterized by large exchange rate depreciation,capital flight and welfare loss can be eliminated by imposing a nonlinear (progressive) tax scheme on capital outflows with the marginal tax rate increasing with the size of individual capital outflows.The implementation of such a tax scheme in China is also discussed.