samlet årgang - Økonomisk Institut - Københavns Universitet

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NATIONALØKONOMISK TIDSSKRIFT 2005. NR. 3
income tax with a rate-of-return allowance will have a negligible impact on the required
return on unquoted shares when these shares only carry a small weight in investor portfolios.
This is the basis for the claim that the tax will be approximately neutral when
investors are well-diversified. 3
The idea that a capital income tax which allows a deduction for the opportunity cost
of finance will be neutral has previously been elaborated by King (1975), Boadway
and Bruce (1984), Fane (1987), Devereux and Freeman (1991), Bond and Devereux
(1995), and Lund (2002), among others. However, all of these authors assumed that
the deduction for the imputed return on equity would be granted at the corporate level.
But as Bond (2000) points out, such a corporation tax on »above-normal« profits would
raise the relative tax burden on the most profitable companies. While this might not
distort investment in a closed economy, in open economies a tax on supernormal profits
would affect the international location decisions of multinational companies earning
mobile rents. The analysis in this section suggests that this distortion may be avoided
if the deduction for an imputed return on equity is instead granted at the shareholder
level.
Although he does not explicitly analyse a tax system with a rate-of-return allowance,
the closed-economy model developed by Gordon (1985) also implies that a personal
capital income tax which exempts the risk-free rate of return will be neutral.
However, in the Gordon model tax neutrality requires that tax revenues be transferred
back to taxpayers in a lump sum fashion. In practice government transfers are not lump
sum, and a substantial part of tax revenue serves to finance public goods provision.
While some publicly provided goods are substitutes for private consumption, other
public goods are complementary to private goods. As an intermediate benchmark, the
model in this paper implicitly assumes that tax revenues finance public goods which
enter investor utility functions in an additively separable manner.
5. The Norwegian tax regime in general equilibrium with incomplete portfolio
diversification
In practice the owners of small unquoted companies often invest a large fraction of
their wealth in their own company. This does not necessarily invalidate the neutrality
result derived in the previous section as long as the marginal shareholder in the firm
(whose required return determines the cost of equity finance) is well diversified.
Nevertheless, it is also of interest to analyse the case where investors are less well di-
3. When v 1 and/or v 2 are significantly above zero, the tax will no longer be neutral, since it will affect 1 and
2 via its impact on the portfolio shares v j . Hence the neutrality result holds only in the case of well-diversified
investors where v 1 and v 2 tend to zero, since in this case the portfolio shares drop out of the expressions
for j. The next section will deal with the case of incomplete portfolio diversification.