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Dividend Taxes and International Portfolio Choice

Author

Listed:
  • Mihir A. Desai

    (Harvard University and NBER)

  • Dhammika Dharmapala

    (University of Illinois at Urbana-Champaign)

Abstract

This paper investigates how dividend taxes influence portfolio choices, using the response to the distinctive treatment of a subset of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. An open-economy after-tax capital asset pricing model is used to derive the hypothesis that JGTRRA should lead to a portfolio reallocation by US investors towards equities in tax-favored countries. A difference-in-difference analysis that compares US equity holdings in affected and unaffected countries finds a substantial portfolio reallocation towards the former. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment, changed tax evasion behavior, or changes in stock prices associated (or contemporaneous) with JGTRRA.

Suggested Citation

  • Mihir A. Desai & Dhammika Dharmapala, 2009. "Dividend Taxes and International Portfolio Choice," Working Papers 0911, Oxford University Centre for Business Taxation.
    • Handle: RePEc:btx:wpaper:0911
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    File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/Series_09/WP0911.pdf
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    Keywords

    Dividends; Portfolio Choice; Taxes; Tax Treaties; Foreign Portfolio Investment;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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