ABSTRACT
In ‘real life’, apart from corporate tax, investors also pay personal income tax and capital gains taxes. We have previously defined TC to be the rate of corporation tax. We now define TP to be the rate of personal taxation and TG to be rate at which capital gains taxes are levied. In many countries, capital gains taxes are levied at a lower rate than personal taxes and so this implies that TG < TP. Moreover, it is often possible to delay the payment of capital gains taxes by not selling the asset on which the taxes accrue, and this creates a further ‘wedge’ between the personal and capital gains tax rate. In the UK, there is also a ‘threshold’ below which capital gains are exempt from taxation. However, there are no exemptions from tax in the payment of dividends. Hence, in what follows, we assume TG < TP and so the investor has an incentive to take all value increases in the form of capital gains.
