The Optimal Taxation of Dividends in a Small Open Economy

17 Pages Posted: 28 Mar 2001

See all articles by Clemens Fuest

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Bernd Huber

Ludwig Maximilian University of Munich (LMU) - Staatswirtschaftliches Institut; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 2000

Abstract

This paper analyses the optimal taxation of dividends and other types of income from portfolio investment. We show that, in an open economy, it is not desirable to offer double taxation relief for dividends paid by domestic firms to domestic households. This result holds for fairly general utility functions. The reason is that the marginal shareholder in domestic firms is a foreign investor. This implies that the level of real investment is not affected by the taxation of domestic dividend income at the household level. A reduction of the tax burden on dividends is therefore merely an undesirable subsidy on domestic asset holdings. Our results also extend the literature on the optimal taxation of risky asset income in general.

Keywords: Dividends, international taxation, portfolio investment

JEL Classification: H21, H87, G11

Suggested Citation

Fuest, Clemens and Huber, Bernd, The Optimal Taxation of Dividends in a Small Open Economy (October 2000). CESifo Working Paper Series No. 348. Available at SSRN: https://ssrn.com/abstract=263315

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

Poschinger Str. 5
Munich, DE 81679
Germany
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Ludwig-Maximilians-University, Munich ( email )

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Germany

Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, DE 80539
Germany
++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

Bernd Huber (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Staatswirtschaftliches Institut ( email )

Ludwigstrasse 28/III VG
D-80799 Munich
Germany
+49 89 2180-2874 (Phone)
+49 89 2180-3128 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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