Vol. 1, No. 1

Sixten Korkman, Erkki Koskela and Jouko Ylä-liedenpohja:
Perspectives on capital income taxation in Europe: an introduction (pp. 5–8)

Agnar Sandmo:
The taxation of household durable goods (pp. 13–24)


Starting from issues raised in current debates about tax policy, this paper considers the optimal taxation of durable consumer goods in the context of a two period overlapping generations model. The consumer model is one where individuals work in the first period, being retired in the second, and invest their savings either in financial assets or in durable goods. The optimum tax analysis considers several problems of tax policy under alternative assumptions about the policy instruments available to the government and about the nature of preferences. The role of the compensated cross-elasticities between labour supply, savings and durable goods is emphasized.

Julian S. Alworth and Wilhelm Fritz:
Capital mobility, the cost of capital under certainty and effective tax rates in Europe (pp. 25–42)

Peter Birch Sörensen:
Reforms of Danish capital income taxation in the 1980’s Full text 1 [pdf] Full text 2 [pdf] (pp. 45–71)

Vesa Kanniainen:
An alternative corporation tax: implications for efficiency of investment and valuation of shares (pp. 72–81)


The paper studies a corporation tax that, under certain conditions, implies that the effective marginal corporation tax rate is zero. Thus, no problem of double taxation arises at the margin. Second, the tax allows for adjustment of the tax base for capital risk, a property not shared by the expected economic depreciation approach. Though the mechanisms are different, the tax thus shares the major implications of the pure cash-flow corporation tax. Moreover, as it is in the case ofthe cash-flow tax, the corporation tax is capitalized in share prices. These implications arise if the credit market is not perfect enough to allow for a flexible substitution between tax debt and market debt.

Jouko Ylä-Liedenpohja:
Measuring the welfare loss of the Finnish proposal for interest income taxation (pp. 82–93)


A welfare loss of about 5 to 6 per cent of the capital stock is estimated to result from the introduction of a tax on real domestic interest receipts in the 1983 Finnish economy. Firstly. a review of the history of the tax treatment of interest income and of the proposal to change it are presented. It is pointed out that prior to the year of 1983 the Finnish economy operated approximately so that no tax wedge was included in the domestic average lending rates. Secondly, the effects of the imposition ofa tax in such circumstances on domestic
interest rates is analysed graphically in the presence of international capital flows. It is observed that if the domestic (foreign) investors determine solely the domestic tax-free interest rates, the tax will shift 100 per cent forward (backward). Hence. a welfare loss results in the form of reduced domestic investment (saving). Thirdly, limitations and crucial parameter values of the applied three-sector general equilibrium model are explained. and there is also a description of how the proposed reform is tackled in the model. Finally, the consumer’s equivalent variation is calculated for each successive year by comparing the new utility level to the one along the reference path. The present value of those un weighted losses in relation to the capital stock gives the welfare loss.

Gerold Krause-Junk:
International profits and interest payments: do the tax differentials still make any sense? (pp. 94–104)


According to the Western Cominental European doctrine, international capital incomes are taxed differently according to whether they derive from equity or loans. Principally – though there are lots of practical deviations – interest payments are taxed according to the rules of the residence country, which is also the recipient of the tax yield, whereas profits are taxed according to the rules of the source country, which is also the beneficiary of the tax income. The basic rationale behind this differentiation is Slimmed up by the following two propositions, namely

(1) The relevant tax system is to be determined by the location of the entrepreneurial activity.
(2) Entrepreneurial activity typically is related to ownership and is not related to the extension of credit.

The paper questions both of these propositions and comes to the conclusion that the tax differentials do not make sense any more.

Pasi Sorjonen:
The relative valuation of dividends and capital gains in Finland (pp. 105–117)


This study examines the relative valuation of dividends and capital gains in the Finnish stock market in 1960-1985. Stock prices fell on ex-dividend days by less than Ihe amount of dividend implying that investors faced lower marginal tax rates on capital gains than on dividend income. It is, however, the total tox liability of the company and the shareholder together that should be used to infer market preference for dividends or capital gains. Using the estimation results of our ex-dividend analysis and estimates of corporate tax rates on retained and distributed profit we find that investors have shifted from capital gains preference to dividend preference. The reason for this outcome is the tax advantage of distributed profit in corporate taxation which has outweighted the tax disadvantage of dividend income in personal taxation.

Ali Bayar and Peter Praet:
Capital income taxation in an economic and monetary union in the making: a case for tax reform (pp. 118–120)

Anthonie Knoester:
The Haavelmo Effect Revisited (pp. 121–125)

Finnish Economic Papers 1/1988

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