samlet årgang - Økonomisk Institut - Københavns Universitet

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NATIONALØKONOMISK TIDSSKRIFT 2005. NR. 3
From 2006 Norway will only impose personal tax on dividends exceeding an imputed
rate of return to the share, and Sweden has already implemented a similar tax rule for
dividends from unquoted shares. Several other countries are granting full or partial
credit for the underlying corporation tax against the personal tax on dividends.
However, proponents of the »new view« of dividend taxation have argued that there
is little need to alleviate the double taxation of dividends. They point out that retained
earnings are the main source of equity finance, and that the returns to shareholders
accrue as capital gains when corporate investment is financed by retentions. Hence
they conclude that double taxation is hardly a serious problem in a world where effective
tax rates on capital gains on shares are typically quite low, see King (1974), Auerbach
(1979), Bradford (1981), and Sinn (1987).
More recently, the international integration of capital markets has popularized the
view that neither personal dividend taxes nor personal taxes on capital gains have any
significant impact on corporate investment incentives in a small open economy, see,
e.g., Boadway and Bruce (1992), Sørensen (1995), Andersson et al. (1998), and Fuest
and Huber (2000). According to this view the marginal shareholder in a small economy
with an open stock market is likely to be a foreign investor whose required return
on shares is unaffected by personal taxes on domestic residents. If a residence-based
personal tax on equity income makes shareholding less attractive to domestic investors,
they will sell off (some of) their domestic shares to foreign investors who
stand ready to buy domestic shares at prices determined on the world stock market.
Thus, although they will influence the pattern of ownership, personal taxes on equity
income will have no effect on the cost of equity finance for domestic corporations.
Many policy makers have found it hard to accept the postulate that personal taxes
on equity income are irrelevant for real investment incentives in a small open economy.
They argue that although this claim may be relevant for large firms that are
listed on the stock exchange, the smaller unquoted firms do not, in practice, have access
to the international equity market. If shares in small unquoted companies are imperfect
substitutes for shares in large public corporations, say, because they have different risk
characteristics, one might therefore think that personal taxes on dividends and capital
gains will drive up the cost of equity for small companies.
In a recent paper Apel and Södersten (1999) have tried to take this concern seriously.
They set up a mean-variance model of portfolio choice in a small open economy where
domestic investors may hold three assets: risk-free bonds; shares in small companies
which are not traded internationally; and shares in large corporations which are traded
in the international stock market. Within this framework they study the effects of personal
taxes on domestic holdings of traded shares and on the required rate of return on
non-traded shares. Their most striking result is that, for plausible parameter values,