Up or down? Capital income taxation in the United States and the United Kingdom
AbstractEmpirical evidence suggests that the Effective Marginal Tax Rate (EMTR) on income from capital has increased considerably in both the United States and the United Kingdom over the period 1982-2005. This evidence contradicts the corporate tax literature which predicts that the EMTR should instead fall over time as a result of increasing international capital mobility and higher tax competition between governments. This paper argues that this inconsistency is entirely due to the fact that EMTRs on income from capital are currently computed from versions of the neoclassical investment model which do not take into account financial constraints on dividend policy faced by firms investing in both the United States and the United Kingdom. The paper incorporates financial constraints on dividend policy into the analytical framework for the computation of the EMTR and employs the new model to re-calculate time series of the EMTRs in both countries. The new empirical results show that, in contrast to the existing evidence, the EMTR on investment financed by either retained earnings or new equity has indeed declined over time in both countries, while the EMTR on debt-financed investment has remained relatively stable.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2011/13.
Length: 29 pages
Date of creation: Jun 2011
Date of revision:
Contact details of provider:
Postal: Aberconway Building, Colum Drive, CARDIFF, CF10 3EU
Phone: +44 (0) 29 20874417
Fax: +44 (0) 29 20874419
Web page: http://business.cardiff.ac.uk/research/academic-sections/economics/working-papers
More information through EDIRC
Capital income taxation; dividend policy; effective marginal tax rates; financial constraints;
Other versions of this item:
- Vito Polito, 2012. "Up or Down? Capital Income Taxation in the United States and the United Kingdom," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(1), pages 48-82, March.
- Vito Polito, 2010. "Up or Down? Capital Income Taxation in the United States and the United Kingdom," CESifo Working Paper Series 3260, CESifo Group Munich.
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
This paper has been announced in the following NEP Reports:
- NEP-ACC-2011-07-02 (Accounting & Auditing)
- NEP-ALL-2011-07-02 (All new papers)
- NEP-PUB-2011-07-02 (Public Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- M. Bordignon & S. Giannini & P. Panteghini, 1998. "Corporate Taxation in Italy: an Analysis of the 1998 Reform," Working Papers 328, Dipartimento Scienze Economiche, Universita' di Bologna.
- Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002.
"Do Countries Compete over Corporate Tax Rates?,"
CEPR Discussion Papers
3400, C.E.P.R. Discussion Papers.
- Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS) 642, University of Warwick, Department of Economics.
- Backus, David & Henriksen, Espen & Storesletten, Kjetil, 2008.
"Taxes and the global allocation of capital,"
Journal of Monetary Economics,
Elsevier, vol. 55(1), pages 48-61, January.
- Devereux, Michael P & Griffith, Rachel, 2003.
"Evaluating Tax Policy for Location Decisions,"
International Tax and Public Finance,
Springer, vol. 10(2), pages 107-26, March.
- Kanniainen, Vesa & Sodersten, Jan, 1995. "The importance of reporting conventions for the theory of corporate taxation," Journal of Public Economics, Elsevier, vol. 57(3), pages 417-430, July.
- Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
- Harry Garretsen & Jolanda Peeters, 2007. "Capital Mobility, Agglomeration and Corporate Tax Rates: Is the Race to the Bottom for Real?," CESifo Economic Studies, CESifo, vol. 53(2), pages 263-293, June.
- Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR & CES & MSH, vol. 17(35), pages 449-495, October.
- Mervyn A. King & Don Fullerton, 1984. "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany," NBER Books, National Bureau of Economic Research, Inc, number king84-1.
- de Mooij, Ruud A & Ederveen, Sjef, 2003.
"Taxation and Foreign Direct Investment: A Synthesis of Empirical Research,"
International Tax and Public Finance,
Springer, vol. 10(6), pages 673-93, November.
- Ruud de Mooij & S. Ederveen, 2001. "Taxation and foreign direct investment; a synthesis of empirical research," CPB Discussion Paper 3, CPB Netherlands Bureau for Economic Policy Analysis.
- Ruud A. de Mooij & Sjef Ederveen, 2001. "Taxation and Foreign Direct Investment: A Synthesis of Empirical Research," CESifo Working Paper Series 588, CESifo Group Munich.
- King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 21-35, January.
- Kanniainen, Vesa & Sodersten, Jan, 1994. "Costs of monitoring and corporate taxation," Journal of Public Economics, Elsevier, vol. 55(2), pages 307-321, October.
- Vito Polito, 2009. "Measuring the Effective Tax Burden in the Real World," Fiscal Studies, Institute for Fiscal Studies, vol. 30(2), pages 247-278, 06.
- Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
- Boadway, R. W. & Bruce, N., 1979. "Depreciation and interest deductions and the effect of the corporation income tax on investment," Journal of Public Economics, Elsevier, vol. 11(1), pages 93-105, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruce Webb).
If references are entirely missing, you can add them using this form.