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Taxation of shareholder income and the cost of capital in a small open economy

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  • Peter Birch Sørensen

    (University of Copenhagen, Department of Economics)

Abstract

When companies finance their investment via the international markets for stocks and bonds, relief from domestic personal taxes on dividends and capital gains will not reduce the cost of capital. Some authors have shown that even for small domestic companies whose shares are not traded internationally, domestic shareholder tax relief will not necessarily reduce the cost of equity finance. This paper argues that, under realistic assumptions, domestic shareholder tax relief will in fact reduce the cost of capital for small firms. It also argues that a shareholder income tax on the equity premium with full loss offset will improve the allocation of risk in the economy.

Suggested Citation

  • Peter Birch Sørensen, 2014. "Taxation of shareholder income and the cost of capital in a small open economy," Working Papers 1428, Oxford University Centre for Business Taxation.
    • Handle: RePEc:btx:wpaper:1428
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    File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/series-14/WP1428.pdf
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    References listed on IDEAS

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    1. Huber, Bernd, 2000. "Can Corporate-personal Tax Integration Survive in Open Economies? Lessons from the German Tax Reform," Munich Reprints in Economics 19401, University of Munich, Department of Economics.
    2. Boadway, Robin & Bruce, Neil, 1992. "Problems with integrating corporate and personal income taxes in an open economy," Journal of Public Economics, Elsevier, vol. 48(1), pages 39-66, June.
    3. Tobias Lindhe & Jan Södersten, 2012. "The Norwegian shareholder tax reconsidered," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(3), pages 424-441, June.
    4. Agnar Sandmo, 1977. "Portfolio Theory, Asset Demand and Taxation: Comparative Statics with Many Assets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(2), pages 369-379.
    5. Mikael Apel & Jan Södersten, 1999. "Personal Taxation and Investment Incentives in a Small Open Economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(1), pages 79-88, February.
    6. Clemens Fuest & Bernd Huber, 2001. "Can Corporate-personal Tax Integration Survive in Open Economies?. Lessons from the German Tax Reform," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(4), pages 514-524, August.
    7. Taylor, John C. & Clements, Kenneth W., 1983. "A simple portfolio allocation model of financial wealth," European Economic Review, Elsevier, vol. 23(2), pages 241-251.
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