Mitigating shareholder taxation in small open economies?
AbstractThis 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 InfoPaper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2012:12.
Length: 16 pages
Date of creation: 10 Sep 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.
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
Web page: http://www.nek.uu.se/
More information through EDIRC
Shareholder taxation; corporate-personal tax integration; open economy; investment incentives; small firms;
Other versions of this item:
- 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.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ACC-2012-09-30 (Accounting & Auditing)
- NEP-ALL-2012-09-30 (All new papers)
- NEP-PBE-2012-09-30 (Public Economics)
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