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

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Author Info
Tina Klautke ()
Alfons Weichenrieder ()

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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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Publisher Info
Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 2300.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2300

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Related research
Keywords: Savings Directive interest taxation tax capitalization Austria Belgium Luxembourg Liechtenstein

Find related papers by JEL classification:
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

References listed on IDEAS
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  1. Poterba, J.M., 1989. "Tax Reform And The Market For Tax-Exempt Debt," Working papers 514, Massachusetts Institute of Technology (MIT), Department of Economics.
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  2. 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. [Downloadable!] (restricted)
    Other versions:
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This page was last updated on 2008-9-22.

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