Working Paper Series
Jan Södersten and Villy Bergström
Double Taxation and Corporate Capital Cost
Abstract: Several attempts have been made to determine the tax
differential between the corporate and non-corporate sectors of the
economy, implied by the present double taxation of corporate source income.
A common feature of these studies is the assumption that the retention of
corporate profits gives rise to capital gains on a one-for-one basis. By
this assumption, the tax burden on retained earnings is identified with the
tax on capital gains.
In view of the preferential tax treatment given
to capital gains, it is, however, quite rational for a management to
undertake investments that produce less than a dollar's worth of capital
gains for the marginal dollar of retention. To establish this assertion and
its implications for the firm's effective tax burden, a theoretical model
of firm behaviour is introduced. Specifically, the cost of capital to a
firm maximizing stockholders wealth is derived, with due adjustments to the
corporation income tax, stockholders' income tax and capital gains tax. In
this way, the differential tax burden on corporate source income may be
determined with explicit reference to the firm's cost of capital.
Keywords: Taxation; Firm behavior; Capital cost; (follow links to similar papers)
JEL-Codes: H21; L20; (follow links to similar papers)
21 pages, December 1976, Revised July 1978
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
Questions (including download problems) about the papers in this series should be directed to Elisabeth Gustafsson ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom