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Mitigating shareholder taxation in small open economies?

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  • Jacob, Martin

    (Uppsala Center for Fiscal Studies)

  • Södersten, Jan

    (Uppsala Center for Fiscal Studies)

Abstract

This article reconsiders the role of dividend taxation and its effect on the cost of capital of small firms. Using a simple portfolio model for small open economies, we show that a decrease in dividend taxes on large companies unambiguously increases the required rate of return for small companies. A dividend tax cut for both, large and small companies may however lead to the counter-intuitive result of increasing cost of capital for small firms. For different small open economies, we further provide statistics on the correlation between the return of large and small firms that drives the counter-intuitive result. Our results suggest that mitigating payout taxes in small open economies can have ambiguous effects on the cost of capital of small, domestically owned firms. This is particularly relevant when tax reforms are designed to stimulate investments by small firms scarce in internal funds.

Suggested Citation

  • Jacob, Martin & Södersten, Jan, 2012. "Mitigating shareholder taxation in small open economies?," Working Paper Series, Center for Fiscal Studies 2012:3, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uufswp:2012_003
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    References listed on IDEAS

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    1. Boadway, Robin & Bruce, Neil, 1992. "Problems with integrating corporate and personal income taxes in an open economy," Journal of Public Economics, Elsevier, vol. 48(1), pages 39-66, June.
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    3. Alan J. Auerbach & Kevin A. Hassett, 2005. "The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study," NBER Working Papers 11449, National Bureau of Economic Research, Inc.
    4. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
    5. Martin Fochmann & Martin Jacob, 2011. "Behavioral Explanation of Tax Asymmetries," FEMM Working Papers 110021, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    6. Michael Devereux & Harold Freeman, 1995. "The impact of tax on foreign direct investment: Empirical evidence and the implications for tax integration schemes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(1), pages 85-106, February.
    7. Kevin A. Hassett & Alan J. Auerbach, 2005. "The 2003 Dividend Tax Cuts and the Value of the Firm," AEI Economics Working Papers 49878, American Enterprise Institute.
    8. Becker, Bo & Jacob, Marcus & Jacob, Martin, 2013. "Payout taxes and the allocation of investment," Journal of Financial Economics, Elsevier, vol. 107(1), pages 1-24.
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    Cited by:

    1. Jan Södersten, 2020. "Why the Norwegian shareholder income tax is neutral," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(1), pages 32-37, February.

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    More about this item

    Keywords

    Shareholder taxation; corporate-personal tax integration; open economy; investment incentives; small firms;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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