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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.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2012:3.

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Length: 13 pages
Date of creation: 30 Jan 2012
Date of revision:
Publication status: Published as Jacob, Martin and Jan Södersten, 'Mitigating shareholder taxation in small open economies?' in Finnish Economic Papers , 2013.
Handle: RePEc:hhs:uufswp:2012_003

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Shareholder taxation; corporate-personal tax integration; open economy; investment incentives; small firms;

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  1. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  2. David F. Bradford, 1979. "The Incidence and Allocation Effects of a Tax on Corporate Distributions," NBER Working Papers 0349, National Bureau of Economic Research, Inc.
  3. Martin Fochmann & Martin Jacob, 2011. "Behavioral Explanation of Tax Asymmetries," FEMM Working Papers 110021, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  4. Becker, Bo & Jacob, Marcus & Jacob, Martin, 2013. "Payout taxes and the allocation of investment," Journal of Financial Economics, Elsevier, Elsevier, vol. 107(1), pages 1-24.
  5. 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.
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