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Dividend taxation, share repurchases and the equity trap

Author

Listed:
  • Södersten, Jan

    (Uppsala Center for Fiscal Studies)

  • Lindhe, Tobias

    (Uppsala Center for Fiscal Studies)

Abstract

This paper reconsiders the effects of dividend taxation. Particular attention is paid to the form of the “equity trap”, that is, the extent to which cash paid to the shareholders must be taxed as dividends. Our analysis shows that Sinn’s (1991) criticism of the well-known King and Fullerton (1984) methodology for underestimating the cost of new share issues amounts to a misleading comparison across two different regimes for the equity trap. Contrary to Sinn,we find that when dividends are paid following a new issue, as assumed by King-Fullerton, the cost of capital is higher than is the case when no dividends are paid.

Suggested Citation

  • Södersten, Jan & Lindhe, Tobias, 2009. "Dividend taxation, share repurchases and the equity trap," Working Paper Series, Center for Fiscal Studies 2009:5, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uufswp:2009_005
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    Cited by:

    1. Tobias Lindhe & Jan Södersten, 2016. "Dividend Taxation and the Cost of New Share Issues," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 72(2), pages 158-174, June.
    2. Lindhe, Tobias & Södersten, Jan, 2013. "Distortive Effects of Dividend Taxation," Working Paper Series 2013:16, Uppsala University, Department of Economics.
    3. Michael Funke & Marc Gronwald, 2009. "A Convex Hull Approach to Counterfactual Analysis of Trade Openness and Growth," CESifo Working Paper Series 2692, CESifo.
    4. 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.

    More about this item

    Keywords

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    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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