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The Effects of Dividend Taxes on Equity Prices: A Re-examination of the 1997 UK Tax Reform

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Listed:
  • Stephen R Bond

    (Nuffield College, Oxford and Institute for Fiscal Studies)

  • Michael P Devereux

    (Oxford University Centre for Business Taxation and IFS)

  • Alexander Klemm

    (Institute for Fiscal Studies and University College London)

Abstract

We re-examine the extent to which personal taxes on dividends are capitalised into the equity prices of domestic firms, using data from around the time of the 1997 UK dividend tax reform, which removed a significant tax credit for an important group of investors: UK pension funds. The tax-adjusted CAPM suggests that the impact should depend on an average of dividend tax rates across all investors, and that UK pension funds should reduce their holdings of the previously tax-favoured asset: UK equities. Given that UK pension funds are small relative to the total size of the world capital market, a small open economy-type argument implies that the main effect of the reform would be to reduce UK pension funds’ ownership of UK equities, with little impact on the price of UK equities. We present evidence which is consistent with these hypotheses. We discuss why previous research (Bell and Jenkinson, 2002) reached the different conclusion that this tax reform had a large negative impact on UK share prices.

Suggested Citation

  • Stephen R Bond & Michael P Devereux & Alexander Klemm, 2007. "The Effects of Dividend Taxes on Equity Prices: A Re-examination of the 1997 UK Tax Reform," Working Papers 0701, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:0701
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    Cited by:

    1. Henrekson, Magnus & Sanandaji, Tino, 2016. "Owner-Level Taxes and Business Activity," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 12(1), pages 1-94, March.
    2. Seppo Kari & Jussi Laitila, 2015. "Nonlinear Dividend Tax and the Dynamics of the Firm," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 71(2), pages 153-177, June.
    3. Geiler, Philipp & Renneboog, Luc, 2015. "Taxes, earnings payout, and payout channel choice," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 37(C), pages 178-203.
    4. 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.
    5. Michael P. Devereux, 2008. "Taxation of outbound direct investment: economic principles and tax policy considerations," Oxford Review of Economic Policy, Oxford University Press, vol. 24(4), pages 698-719, winter.
    6. repec:eee:pubeco:v:151:y:2017:i:c:p:56-73 is not listed on IDEAS
    7. repec:eee:finana:v:51:y:2017:i:c:p:54-68 is not listed on IDEAS

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