Capital Income Taxation in the EU: Financial Integration and Beyond
Bank of Italy
September 17, 2006
Review of Economic Conditions in Italy, September-December 2006
The quest for financial integration in Europe has created pressures to adapt the taxation of income from capital to the new reality of free capital movments and access to global markets for investments. Taxation of income from capital is among the most important factors affecting investment decisions, as relative returns on real and financial assets may be altered substantially by taxes levied on income and/or capital gains. As a result, cross-border capital flows are also significantly affected by the orientation of tax policy regarding saving and investment. International tax coordination, which requires a dose of political integration, may be limited and cannot always provide a feasible alternative. Substantial improvements in the efficiency of the European markets for government and corporate bonds were achieved in the 1990s; in this instance successful unification of monetary policy in Europe has played an important role. Capital income tax reform has caught up only partially with the rapid changes in the European financial markets. The granting of tax-exempt status to foreign investment in virtually all European counries - Italy's experience being and important case in point - proved to be a crucial factor in fostering a levelled playing field by removing the distortions generated by double taxation on interest income. By contrast, the integration of European stock markets has proceeded at a relatively slow pace when compared to the rapid convergence of money and bond markets. Different corporate tax regimes and cross-countriy disparities in the tax treatment of dividends and capital gains appear to be significant factors segmenting European bourses. Differences in capital income taxation across borders and investors are stil driving a non-negligible wedge across stock market returns and valuations within the euro-area and between it and other currency areas.
Number of Pages in PDF File: 37
Keywords: European Financial Market Integration, Capital Income Taxation, Tax Policy Coordination
JEL Classification: G11, G12, G15, H24, H25
Date posted: September 18, 2008
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