Working Paper Series, Uppsala Center for Fiscal Studies, Department of Economics, Uppsala University
Mitigating shareholder taxation in small open economies?
() and Jan Södersten
Abstract: This article reconsiders the role of dividend taxation and
its effect on the cost of capital of small firms. Using a simple portfolio
model for small open economies, we show that a decrease in dividend taxes
on large companies unambiguously increases the required rate of return for
small companies. A dividend tax cut for both, large and small companies may
however lead to the counter-intuitive result of increasing cost of capital
for small firms. For different small open economies, we further provide
statistics on the correlation between the return of large and small firms
that drives the counter-intuitive result. Our results suggest that
mitigating payout taxes in small open economies can have ambiguous effects
on the cost of capital of small, domestically owned firms. This is
particularly relevant when tax reforms are designed to stimulate
investments by small firms scarce in internal funds.
Keywords: Shareholder taxation; corporate-personal tax integration; open economy; investment incentives; small firms; (follow links to similar papers)
JEL-Codes: H24; H25; (follow links to similar papers)
13 pages, January 30, 2012
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- This paper is published as:
Jacob, Martin and Jan Södersten, (2013), 'Mitigating shareholder taxation in small open economies?', Finnish Economic Papers, No. 1
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