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This paper examines how the effects of dividend taxation on the cost of new equity funds depend on whether or not shareholders can recover their original equity injections without being subject to the dividend tax. We point out the alternative assumptions in the literature on this, and we compare two different tax regimes, one where it is impossible for the firm to pay cash to its shareholders that is not taxed as dividends, the other where the shareholders are allowed a tax-free return of the original capital contributed through new issues. We conclude that any model, which explicitly or implicitly assumes that the shareholders cannot recover their original equity injections without being subject to the dividend tax, exaggerates the distortive effects of the tax.

This paper examines how the effects of dividend taxation on the cost of new equity funds depend on whether or not shareholders can recover their original equity injections without being subject to the dividend tax. We point out the alternative assumptions in the literature on this, and we compare two different tax regimes, one where it is impossible for the firm to pay cash to its shareholders that is not taxed as dividends, the other where the shareholders are allowed a tax-free return of the original capital contributed through new issues. We conclude that any model, which explicitly or implicitly assumes that the shareholders cannot recover their original equity injections without being subject to the dividend tax, exaggerates the distortive effects of the tax.

This paper examines how the distortions caused by dividend taxation depend on whether or not shareholders can recover their original equity injections without being subject to the dividend tax. We point out the alternative assumptions in the literature on this, and we compare two different tax regimes, one where it is impossible for the firm to pay cash to its shareholders that is not taxed as dividends, the other where the shareholders are allowed a tax-free return of the original capital contributed through new issues. Our analysis shows that the regimes imply a substantial difference to our perceptions of the distortive effects of dividend taxation.

This paper examines how the distortions caused by dividend taxation depend on whether or not shareholders can recover their original equity injections without being subject to the dividend tax. We point out the alternative assumptions in the literature on this, and we compare two different tax regimes, one where it is impossible for the firm to pay cash to its shareholders that is not taxed as dividends, the other where the shareholders are allowed a tax-free return of the original capital contributed through new issues. Our analysis shows that the regimes imply a substantial difference to our perceptions of the distortive effects of dividend taxation.

This paper examines how the distortions caused by dividend taxation depend on whether or not shareholders can recover their original equity injections without being subject to the dividend tax. We point out the alternative assumptions in the literature on this, and we compare two different tax regimes, one where it is impossible for the firm to pay cash to its shareholders that is not taxed as dividends, the other where the shareholders are allowed a tax-free return of the original capital contributed through new issues. Our analysis shows that the regimes imply a substantial difference to our perceptions of the distortive effects of dividend taxation.

This policy paper is motivated by the Government's 'Pakistan: framework for Economic Growth (FEG) 2011' which places weak corporate governance at the top of the 'software' constraints to growth. The efforts to reform the State-Owned Enterprises (SOEs) have stalled in Pakistan for almost five years with significant negative implications not only in terms of fiscal losses, but also deteriorated and cost-ineffective service delivery. The paper suggests a number of urgent policy measures designed to improve the efficiency and effectiveness of SOEs. These include basic governance reforms, revamped commercialization processes and enhanced market regulations. The paper also provides some perspectives on international experience on SOE reforms combined with some suggestions on how the Government can move forward.

This paper reconsiders the effects of dividend taxation. Particular attention is paid to the form of the “equity trap”, that is, the extent to which cash paid to the shareholders must be taxed as dividends. Our analysis shows that Sinn’s (1991) criticism of the well-known King and Fullerton (1984) methodology for underestimating the cost of new share issues amounts to a misleading comparison across two different regimes for the equity trap. Contrary to Sinn, we find that when dividends are paid following a new issue, as assumed by King-Fullerton, the cost of capital is higher than is the case when no dividends are paid.

This paper reconsiders the effects of dividend taxation. Particular attention is paid to the form of the "equity trap", that is, the extent to which cash paid to the shareholders must be taxed as dividends. Our analysis shows that Sinn’s (1991) criticism of the well-known King and Fullerton (1984) methodology for underestimating the cost of new share issues amounts to a misleading comparison across two different regimes for the equity trap. Contrary to Sinn, we find that when dividends are paid following a new issue, as assumed by King-Fullerton, the cost of capital is higher than is the case when no dividends are paid.

This paper reconsiders the effects of dividend taxation. Particular attention is paid to the form of the 'equity trap', that is, the extent to which cash paid to the shareholders must be taxed as dividends. Our analysis shows that Sinn's (1991) criticism of the well-known King and Fullerton (1984) methodology for underestimating the cost of new share issues amounts to a misleading comparison across two different regimes for the equity trap. Contrary to Sinn, we find that when dividends are paid following a new issue, as assumed by King-Fullerton, the cost of capital is higher than is the case when no dividends are paid.

This paper reconsiders Sinn’s (1991) nucleus theory of the corporation by comparing two different regimes for the equity trap. In the first of these, all cash paid to the shareholders is taxed as dividends, in the second, shareholders are allowed a tax-free return of capital contributed through new issues. A substantial difference is found between the regimes in the seize of initial equity injections, although in both regimes, no dividends are paid until a new long-run equilibrium is reached. Contrary to Sinn, we find that with optimal behavior, the cost of new equity is lower than suggested by conventional formulae.

This paper reconsiders Sinn’s (1991) nucleus theory of the corporation by comparing two different regimes for the equity trap. In the first of these, all cash paid to the shareholders is taxed as dividends, in the second, shareholders are allowed a tax-free return of capital contributed through new issues. A substantial difference is found between the regimes in the seize of initial equity injections, although in both regimes, no dividends are paid until a new long-run equilibrium is reached. Contrary to Sinn, we find that with optimal behavior, the cost of new equity is lower than suggested by conventional formulae.