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

  • Chris Jones

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    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.

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    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp518.pdf
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    Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2010-518.

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    Length: 29 Pages
    Date of creation: Apr 2010
    Date of revision:
    Handle: RePEc:acb:cbeeco:2010-518
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