The Capital Tax and Welfare Effects from Asymmetric Information on Equity Markets

Ed Westerhout ()

International Tax and Public Finance, 2002, vol. 9, issue 3, 219-233

Abstract: This paper explores the implications of informational asymmetries between domestic and foreign investors for optimal capital tax rates and welfare. It adopts a model in which asymmetric information implies a home bias in equity. The paper finds that asymmetric information may raise capital tax rates by reducing the marginal cost of taxation. Furthermore, it shows that investors may gain from informational asymmetries. Although asymmetric information increases the uncertainty as perceived by investors, it may also increase tax rates and allow for a higher consumption of public goods. This reflects that asymmetric information may reduce the distortionary effects of competition among governments. Copyright Kluwer Academic Publishers 2002

Keywords: equity home bias; asymmetric information; capital taxation; marginal cost of taxation; theory of second best (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:9:y:2002:i:3:p:219-233

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DOI: 10.1023/A:1016263125158

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