Taxation of shareholder income and the cost of capital in an open economy: theory and applications to the Nordic countries

Peter Birch Sørensen ()
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Peter Birch Sørensen: Department of Economics, University of Copenhagen, EPRU and CESifo

Nationaløkonomisk tidsskrift, 2005, vol. 2005, issue 1, 433-447

Abstract: This paper discusses whether double taxation of corporate equity income distorts corporate investment in an open economy. The integration of capital markets has popularized the view that domestic personal taxes on dividends and capital gains have no impact on real investment incentives in a small open economy. The present paper argues that a personal tax on equity income in an open economy will in fact distort the required returns on shares in small companies which are not traded in the international stock market. However, if shareholders are granted a deduction for a riskfree rate of return, in line with the recent Norwegian tax reform, the tax will be neutral towards real investment when investors are well diversified. If they are not, a personal tax on the equity premium will tend to reduce the required return on shares in small companies, because of the income insurance effect of a tax with full loss offsets. This tendency will be amplified if the rate-of-return allowance is granted only to holders of shares in small companies, in line with current practice in Sweden.

Keywords: economy; taxation; capital (search for similar items in EconPapers)
JEL-codes: A10 (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:jdaecn:0180

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