Frontpage News 2014 Danish dividend ta...

Danish dividend tax undermines the risk appetite

22 April 2014

​New calculations from the Danish Bankers Association show that the progressive tax on share income favours investments in companies with low risk profiles. This hampers the Danish productivity, says the Danish Bankers Association’s Chief Economist.

The Productivity Commission recently recommended giving Danish corporation and capital taxation a thorough inspection. This view is shared by the Danish Bankers Association.

A lot of Danish companies – especially the smaller ones – need more risk capital. Seen in this light, it is undesirable that we have a capital income tax in Denmark that reduces the net yield on risky investments,’’ Niels Storm Stenbæk, Chief Economist at the Danish Bankers Association, points out.
 
In a new analysis, the Danish Bankers Association has compared the return on an investment of half a million Danish Kroner over five years in three different companies. The companies make the same overall result during the period, but the return is different from year to year in the three cases.
 

Stable return gives the lowest taxation

‘’Companies with a stable return get the most out of the lowest dividend tax rate of 27 percent. Companies, that are first to build up the business and then later on reap a return, are worse off to potential shareholders, because a larger part the total return is taxed with the highest rate of 42 percent. The same is true for companies where the return varies from year to rear,’’ Stenbæk explains.
 
Therefore, he proposes, like the Productivity Commission, that politicians break with this tax distortion. Because the Danish companies need risk capital here and now.
 
"We agree that the taxation of share income should be proportional and not progressive. It will increase the likelihood that capital and hence investment are placed where they are most profitable, "says Niels Storm Stenbæk.
 

Great potential with less distortion

Small and medium sized businesses are especially dependent of strengthening self-financing through investments from private investors. And if you look at the total amount of capital that the Danes have on hand in available funds, there is great potential at a better allocation of resources.
 
"The Danish households currently have around 1,650 billion Danish Kroner invested in companies outside the pension system. If one imagines that only a small proportion of this capital is not positioned optimally because of the tax rules, there is still considerable potential in less distortionary taxes, " Niels Storm Stenbæk continues and refers to recent figures from the Danish Central Bank's report on the financial accounts which shows how large amounts businesses and households have at their disposal i.a. for investment in companies. 
 
Figure 1. Households’ and companies’  investments, distributed on type
Source: The Danish Central Bank
Note: The figures are compiled at the end of 2013. "Equity holdings" in-clude, for example, unlisted shares of small and medium sized businesses.
  
 
Figure 2. Alternative return procedure – postponed return 

Source: The Danish Bankers Association’s own calculations
Note: It is assumed that the company pays out all profits as dividends. This calculation does not take inflation or temporal preference for dividend payments into account. It is assumed that the latter would imply a higher required rate of return, because a shareholder would like to get the return paid out as soon as possible.

 

 

 

Figure 3. Alternative return procedure – varying return.
Source: The Danish Bankers Association’s own calculations.
Note: It is assumed that the company pays out all profits as dividends. In this calculation, inflation or temporal preference for dividend payments are not taken into account. It is assumed that the latter would result in a higher required rate of return, because a shareholder would like to get the return paid out as soon as possible.
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