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Costs of capital and wealth tax: Remarks on Bjerksund and Schjelderup (2022)

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  • Kruschwitz, Lutz
  • Löffler, Andreas
  • Lorenz, Daniela
  • Uttscheid, Moritz

Abstract

This note incorporates wealth taxes in a simple asset valuation model based on discounted cash flows. Any valuation method requires an adjustment of pre-tax into post-tax costs of capital. By adopting the adjustment procedure proposed in previous literature, we show that arbitrage opportunities can occur - which is incompatible with a consistent valuation. In particular, such problems arise if a wealth tax system applies that uses current (instead of previous) stock prices as the basis for assessment. Furthermore, in this setting we derive a consistent relation between pre-tax and post-tax costs of capital that is compatible with the premise of no-arbitrage by exploiting risk-neutral probabilities.

Suggested Citation

  • Kruschwitz, Lutz & Löffler, Andreas & Lorenz, Daniela & Uttscheid, Moritz, 2023. "Costs of capital and wealth tax: Remarks on Bjerksund and Schjelderup (2022)," arqus Discussion Papers in Quantitative Tax Research 279, arqus - Arbeitskreis Quantitative Steuerlehre.
    • Handle: RePEc:zbw:arqudp:279
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    References listed on IDEAS

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    1. Arun Advani & Hannah Tarrant, 2021. "Behavioural responses to a wealth tax," Fiscal Studies, John Wiley & Sons, vol. 42(3-4), pages 509-537, September.
    2. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    3. Emmanuel Saez & Gabriel Zucman, 2022. "Wealth Taxation: Lessons from History and Recent Developments," AEA Papers and Proceedings, American Economic Association, vol. 112, pages 58-62, May.
    4. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
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