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The Capital Tax and Welfare Effects from Asymmetric Information on Equity Markets

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  • Ed Westerhout

Abstract

This paper explores the implications of informational asymmetries between domestic and foreign investors for optimal capital tax rates and welfare. It adopts a model in which asymmetric information implies a home bias in equity. The paper finds that asymmetric information may raise capital tax rates by reducing the marginal cost of taxation. Furthermore, it shows that investors may gain from informational asymmetries. Although asymmetric information increases the uncertainty as perceived by investors, it may also increase tax rates and allow for a higher consumption of public goods. This reflects that asymmetric information may reduce the distortionary effects of competition among governments. Copyright Kluwer Academic Publishers 2002

Suggested Citation

  • Ed Westerhout, 2002. "The Capital Tax and Welfare Effects from Asymmetric Information on Equity Markets," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(3), pages 219-233, May.
    • Handle: RePEc:kap:itaxpf:v:9:y:2002:i:3:p:219-233
    DOI: 10.1023/A:1016263125158
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    Cited by:

    1. Ogura, Laudo M., 2006. "A note on tax competition, attachment to home, and underprovision of public goods," Journal of Urban Economics, Elsevier, vol. 59(2), pages 252-258, March.

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