The Effects of Dividend Taxes on Equity Prices: A Re-Examination of the 1997 U.K. Tax Reform
Stephen R. Bond
Nuffield College; Institute for Fiscal Studies (IFS)
Michael P. Devereux
Centre for Business Taxation, Oxford University; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)
International Monetary Fund (IMF)
IMF Working Paper No. 07/204
We re-examine the extent to which personal taxes on dividends are capitalized into the equity prices of domestic firms, using data from around the time of the 1997 U.K. dividend tax reform, which removed a significant tax credit for an important group of investors: U.K. pension funds. The tax-adjusted CAPM suggests that the impact should depend on an average of dividend tax rates across all investors, and that U.K. pension funds should reduce their holdings of the previously tax-favored asset: U.K. equities. Given that U.K. pension funds are small relative to the total size of the world capital market, a small open economy-type argument implies that the main effect of the reform would be to reduce U.K. pension funds' ownership of U.K. equities, with little impact on their price. We present evidence which is consistent with these hypotheses. We discuss why previous research (Bell and Jenkinson, 2002) reached a different conclusion.
Number of Pages in PDF File: 32
Keywords: Working Paper, United Kingdom, Tax reforms, Stock prices, Pensions, Investment, Economic modelsworking papers series
Date posted: November 28, 2007
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