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Firm Valuations, the Cost of Capital and the Tax Treatment of Capital Gains

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  • Chris Jones

Abstract

By recognising the cash flow characteristics of personal taxes on dividends Auerbach, Bradford and King find they reduce the current value of a firm’s equity without affecting the marginal cost of capital funded from retained earnings. This paper draws on work by Boadway and Bruce to show why personal taxes levied on realized capital gains have the same effects, where the common practice of approximating them with accrual based taxes set at lower rates is misleading. We use these findings to recommend reforms to dividend imputation schemes that would convert progessive personal taxes on (taxed) equity income into accrual based taxes.

Suggested Citation

  • Chris Jones, 2010. "Firm Valuations, the Cost of Capital and the Tax Treatment of Capital Gains," ANU Working Papers in Economics and Econometrics 2010-518, Australian National University, College of Business and Economics, School of Economics.
    • Handle: RePEc:acb:cbeeco:2010-518
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    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp518.pdf
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    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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