Working Paper Series, Uppsala Center for Fiscal Studies, Department of Economics, Uppsala University
Dividend taxation, share repurchases and the equity trap
() and Tobias Lindhe
Abstract: 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.
Keywords: dividend taxation; share repurchases; equity trap; cost of capital; nucleus theory; growth path; (follow links to similar papers)
JEL-Codes: H24; H25; H32; (follow links to similar papers)
27 pages, May 15, 2009
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