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Dividend taxation, share repurchases and the equity trap

  • Södersten, Jan

    ()

    (Uppsala Center for Fiscal Studies)

  • Lindhe, Tobias

    ()

    (Uppsala Center for Fiscal Studies)

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.

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File URL: http://ucfs.nek.uu.se/digitalAssets/129/129510_wp20095.pdf
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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2009:5.

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Length: 27 pages
Date of creation: 15 May 2009
Date of revision:
Handle: RePEc:hhs:uufswp:2009_005
Contact details of provider: Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
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  1. Hans-Werner Sinn, 1991. "Taxation and the Cost of Capital: The "Old" View, the "New" View, and Another View," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 25-54 National Bureau of Economic Research, Inc.
  2. Kevin A. Hassett & Alan J. Auerbach, 2005. "The 2003 Dividend Tax Cuts and the Value of the Firm," Working Papers 49878, American Enterprise Institute.
  3. David F. Bradford, 1979. "The Incidence and Allocation Effects of a Tax on Corporate Distributions," NBER Working Papers 0349, National Bureau of Economic Research, Inc.
  4. Alan J. Auerbach & Kevin A. Hassett, 2005. "The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study," NBER Working Papers 11449, National Bureau of Economic Research, Inc.
  5. Alan J. Auerbach, 1982. "Taxation, Corporate Financial Policy and the Cost of Capital," NBER Working Papers 1026, National Bureau of Economic Research, Inc.
  6. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Journal of Public Economics, Elsevier, vol. 45(3), pages 271-300, August.
  7. Alan J. Auerbach, 1980. "Wealth Maximization and the Cost of Capital," NBER Working Papers 0254, National Bureau of Economic Research, Inc.
  8. Sinn, Hans-Werner, 1991. "Share repurchases, the ’new’ view, and the cost of capital," Munich Reprints in Economics 19844, University of Munich, Department of Economics.
  9. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292 Elsevier.
  10. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 449-495, October.
  11. Tobias Lindhe & Jan Södersten, 2006. "The Equity Trap, the Cost of Capital and the Firm’s Growth Path," CESifo Working Paper Series 1801, CESifo Group Munich.
  12. Auerbach, Alan J. & Hassett, Kevin A., 2003. "On the marginal source of investment funds," Journal of Public Economics, Elsevier, vol. 87(1), pages 205-232, January.
  13. Mervyn A. King & Don Fullerton, 1984. "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany," NBER Books, National Bureau of Economic Research, Inc, number king84-1, December.
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