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Personal Taxation and Investment Incentives in a Small Open Economy

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  • Mikael Apel
  • Jan Södersten

Abstract

A simple portfolio model is used to investigate the effects of personal taxes on real investment incentives in a small open economy with large and small firms. When shares in large firms can be traded internationally and their rate of return is exogenously determined on international equity markets, a tax on the return on riskless bonds will induce a portfolio shift from bonds to shares in large firms. This shift reduces the impact of the bond tax on the required rate of return on shares in domestically owned small firms, provided that returns on shares in small and large firms are positively correlated. The total impact of the bond tax may even change from a negative to a counter-intuitive positive one if the “beta” between the returns on small and large firms is above unity. A personal tax on equity returns does in general have an ambiguous impact on the pre-tax rate of return requirement of domestically owned firms. An exogenous rate of return on large company shares is shown to enhance the possibility for the equity tax to reduce the required pre-tax rate of return in small domestic firms. A sufficient condition for a negative relationship is again that the “beta” between the returns in small and large firms is above unity. Copyright Kluwer Academic Publishers 1999

Suggested Citation

  • Mikael Apel & Jan Södersten, 1999. "Personal Taxation and Investment Incentives in a Small Open Economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(1), pages 79-88, February.
  • Handle: RePEc:kap:itaxpf:v:6:y:1999:i:1:p:79-88
    DOI: 10.1023/A:1008699920869
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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.
    2. Nielsen, Soren Bo & Sorensen, Peter Birch, 1991. "Capital income taxation in a growing open economy," European Economic Review, Elsevier, vol. 35(1), pages 179-197, January.
    3. Roley, V Vance, 1979. "A Theory of Federal Debt Management," American Economic Review, American Economic Association, vol. 69(5), pages 915-926, December.
    4. Roger H. Gordon, 1985. "Taxation of Corporate Capital Income: Tax Revenues Versus Tax Distortions," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 1-27.
    5. 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.
    6. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
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    Citations

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    Cited by:

    1. Peter Birch Sørensen, 2005. "Dual Income Taxation: Why and How?," EPRU Working Paper Series 05-10, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    2. Kari Seppo, 2015. "Corporate tax in an international environment – Problems and possible remedies," Nordic Tax Journal, Sciendo, vol. 2015(1), pages 1-16, September.
    3. Magnus Henrekson & Tino Sanandaji, 2011. "Entrepreneurship and the theory of taxation," Small Business Economics, Springer, vol. 37(2), pages 167-185, September.
    4. Peter Birch Sørensen, 2005. "Dual Income Taxation: Why and how?," CESifo Working Paper Series 1551, CESifo Group Munich.
    5. Peter Birch Sørensen, 2014. "Taxation of shareholder income and the cost of capital in a small open economy," Working Papers 1428, Oxford University Centre for Business Taxation.
    6. Michele Bernasconi & Anna Marenzi & Laura Pagani, 2005. "Corporate Financing Decisions and Non-Debt Tax Shields: Evidence from Italian Experiences in the 1990s," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(6), pages 741-773, November.
    7. Tobias Lindhe & Jan Södersten, 2012. "The Norwegian shareholder tax reconsidered," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(3), pages 424-441, June.
    8. Peter Birch Sørensen, 2014. "Taxation of Shareholder Income and the Cost of Capital in a Small Open Economy," CESifo Working Paper Series 5091, CESifo Group Munich.
    9. Hultkrantz, Lars & A. Krüger, Niclas & Mantalos, Panagiotis, 2014. "Risk-adjusted long-term social rates of discount for transportation infrastructure investment," Research in Transportation Economics, Elsevier, vol. 47(C), pages 70-81.
    10. Peter Birch Sørensen, 2003. "Neutral Taxation of Shareholder Income: A Norwegian Tax Reform Proposal," CESifo Working Paper Series 1036, CESifo Group Munich.
    11. Massimo Bordignon & Silvia Giannini & Paolo Panteghini, 2001. "Reforming Business Taxation: Lessons from Italy?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(2), pages 191-210, March.
    12. Annette Alstadsæter & Martin Jacob, 2016. "Dividend Taxes and Income Shifting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 118(4), pages 693-717, October.
    13. repec:eee:pubeco:v:151:y:2017:i:c:p:74-83 is not listed on IDEAS
    14. Lindhe, Tobias & Södersten, Jan & Öberg, Ann, 2003. "Economic Effects of Taxing Different Organizational Forms under a Dual Income Tax," Working Paper Series 2003:19, Uppsala University, Department of Economics.
    15. Peter Birch Sørensen, 2006. "Dual Income Tax: Why and How?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(4), pages 559-586, February.
    16. Peter Sørensen, 2005. "Neutral Taxation of Shareholder Income," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(6), pages 777-801, November.
    17. Alstadsæter, Annette & Jacob, Martin & Michaely, Roni, 2017. "Do dividend taxes affect corporate investment?," Journal of Public Economics, Elsevier, vol. 151(C), pages 74-83.
    18. Annette Alstadsaeter, 2007. "The Achilles Heel of the Dual Income Tax: The Norwegian Case," Finnish Economic Papers, Finnish Economic Association, vol. 20(1), pages 5-22, Spring.
    19. Peter Birch Sørensen, 2003. "Neutral Taxation of Shareholder Income: A Norwegian Tax Reform Proposal," EPRU Working Paper Series 03-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.

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