The Effects of Dividend Taxes on Equity Prices: A Re-Examination of the 1997 U.K. Tax Reform

32 Pages Posted: 28 Nov 2007

See all articles by Stephen R. Bond

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); Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR); University of Oxford - Said Business School; University of Oxford - Said Business School

Alexander Klemm

International Monetary Fund (IMF)

Date Written: August 2007

Abstract

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.

Keywords: Working Paper, United Kingdom, Tax reforms, Stock prices, Pensions, Investment, Economic models

Suggested Citation

Bond, Stephen R. and Devereux, Michael P. and Klemm, Alexander, The Effects of Dividend Taxes on Equity Prices: A Re-Examination of the 1997 U.K. Tax Reform (August 2007). IMF Working Papers, Vol. , pp. 1-30, 2007. Available at SSRN: https://ssrn.com/abstract=1033204

Stephen R. Bond (Contact Author)

Nuffield College ( email )

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Institute for Fiscal Studies (IFS)

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Michael P. Devereux

Centre for Business Taxation, Oxford University ( email )

Said Business School
Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Alexander Klemm

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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