Interest Income Tax Evasion, the EU Savings Directive, and Capital Market Effects
Goethe University Frankfurt
Alfons J. Weichenrieder
University of Frankfurt - Chair of Public Finance; CESifo (Center for Economic Studies and Ifo Institute); Vienna University of Economics and Business Administration
May 1, 2008
CESifo Working Paper Series No. 2300
The Savings Directive has been celebrated as a major political break-through in coordinating taxation in Europe. Against this background, the present paper evaluates the real-world effects of this directive. The directive has left a loophole by providing grandfathering (exemption from withholding tax) for some securities. In this paper we compare the pre-tax returns of exempt bonds and comparable taxable bonds. If working around the Savings Directive is difficult for tax evaders in Europe, then investors should be willing to pay a premium for bonds that are exempt from the withholding rate. Conversely, if such a premium is absent, then we may conclude that the supply of existing loopholes (exempt bonds included) is large enough to allow tax evaders to continue evasion at no additional cost. The findings of our study are in line with this latter interpretation.
Number of Pages in PDF File: 22
Keywords: Savings Directive, interest taxation, tax capitalization, Austria, Belgium Luxembourg, Liechtenstein
JEL Classification: H24, G12, G15working papers series
Date posted: May 21, 2008
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