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The Optimal Taxation of Dividends in a Small Open Economy

  • Clemens Fuest
  • Bernd Huber

This paper analyses the optimal taxation of dividends and other types of income from portfolio investment. We show that, in an open economy, it is not desirable to offer double taxation relief for dividends paid by domestic firms to domestic households. This result holds for fairly general utility functions. The reason is that the marginal shareholder in domestic firms is a foreign investor. This implies that the level of real investment is not affected by the taxation of domestic dividend income at the household level. A reduction of the tax burden on dividends is therefore merely an undesirable subsidy on domestic asset holdings. Our results also extend the literature on the optimal taxation of risky asset income in general.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2000/wp-cesifo-2000-10/cesifo_wp348.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 348.

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Date of creation: 2000
Date of revision:
Handle: RePEc:ces:ceswps:_348
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  1. Robin Boadway & Neil Bruce, 1988. "Problems with Integrating Corporate and Personal Income Taxes in an Open Economy," Working Papers 735, Queen's University, Department of Economics.
  2. Wolfram Richter, 1992. "The optimal taxation of risky capital income: An elasticity rule," Journal of Economics, Springer, vol. 55(1), pages 101-111, February.
  3. Gordon, Roger H. & Varian, Hal R., 1989. "Taxation of asset income in the presence of a world securities market," Journal of International Economics, Elsevier, vol. 26(3-4), pages 205-226, May.
  4. Christiansen, Vidar, 1995. "Normative Aspects of Differential, State-Contingent Capital Income Taxation," Oxford Economic Papers, Oxford University Press, vol. 47(2), pages 286-301, April.
  5. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
  6. Stiglitz, Joseph E, 1982. "The Inefficiency of the Stock Market Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 241-61, April.
  7. 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, vol. 2(1), pages 85-106, February.
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