Interest Income Tax Evasion, the EU Savings Directive, and Capital Market Effects

22 Pages Posted: 21 May 2008

See all articles by Tina Klautke

Tina Klautke

Goethe University Frankfurt

Alfons J. Weichenrieder

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy; Vienna University of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 1, 2008

Abstract

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.

Keywords: Savings Directive, interest taxation, tax capitalization, Austria, Belgium Luxembourg, Liechtenstein

JEL Classification: H24, G12, G15

Suggested Citation

Klautke, Tina and Weichenrieder, Alfons J., Interest Income Tax Evasion, the EU Savings Directive, and Capital Market Effects (May 1, 2008). CESifo Working Paper Series No. 2300. Available at SSRN: https://ssrn.com/abstract=1135532

Tina Klautke

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Alfons J. Weichenrieder (Contact Author)

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy ( email )

United States

HOME PAGE: http://www.uni-frankfurt.de/fb02/weichenrieder/

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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