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Interest Income Tax Evasion, the EU Savings Directive and Capital Market Effects

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  • Tina Klautke
  • Alfons J. Weichenrieder

Abstract

The Savings Directive has been celebrated as a major political break-through in coordinating taxation in Europe. Against this background, the present paper evaluates the real-world effects of this directive. The directive has left a loophole by providing grandfathering (exemption from withholding tax) for some securities. In this paper we compare the pre-tax returns of exempt bonds and comparable taxable bonds. If working around the Savings Directive is difficult for tax evaders in Europe, then investors should be willing to pay a premium for bonds that are exempt from the withholding rate. Conversely, if such a premium is absent, then we may conclude that the supply of existing loopholes (exempt bonds included) is large enough to allow tax evaders to continue evasion at no additional cost. The findings of our study are in line with this latter interpretation.

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Bibliographic Info

Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

Volume (Year): 31 (2010)
Issue (Month): 1 (03)
Pages: 151-170

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Handle: RePEc:ifs:fistud:v:31:y:2010:i:1:p:151-170

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References

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  1. Huizinga, Harry & Nielsen, Soren Bo, 2003. "Withholding taxes or information exchange: the taxation of international interest flows," Journal of Public Economics, Elsevier, vol. 87(1), pages 39-72, January.
  2. Poterba, J.M., 1989. "Tax Reform And The Market For Tax-Exempt Debt," Working papers 514, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Wolfgang Eggert & Martin Kolmar, 2002. "Residence-Based Capital Taxation in a Small Open Economy: Why Information is Voluntarily Exchanged and Why it is Not," International Tax and Public Finance, Springer, vol. 9(4), pages 465-482, August.
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Cited by:
  1. Thomas Hemmelgarn & Gaëtan Nicodème, 2009. "Tax Co-ordination in Europe: Assessing the First Years of the EU-Savings Taxation Directive," Working Papers CEB 09-023.RS, ULB -- Universite Libre de Bruxelles.
  2. Dhammika Dharmapala, 2008. "What Problems and Opportunities are Created by Tax Havens?," Working Papers 0820, Oxford University Centre for Business Taxation.
  3. Katarzyna Bilicka & Clemens Fuest, 2012. "With which countries do tax havens share information?," RSCAS Working Papers 2012/06, European University Institute.
  4. Johannesen, Niels, 2014. "Tax evasion and Swiss bank deposits," Journal of Public Economics, Elsevier, vol. 111(C), pages 46-62.
  5. Katarzyna Bilicka & Clemens Fuest, 2014. "With which countries do tax havens share information?," International Tax and Public Finance, Springer, vol. 21(2), pages 175-197, April.

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