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arqus Discussion Paper No. 279
Arbeitskreis Quantitative Steuerlehre (arqus), Berlin
This note incorporates wealth taxes in a simple asset valuation model based on discounted cash flows. Any valuation method requires an adjustment of pre-tax into post-tax costs of capital. By adopting the adjustment procedure proposed in previous literature, we show that arbitrage opportunities can occur - which is incompatible with a consistent valuation. In particular, such problems arise if a wealth tax system applies that uses current (instead of previous) stock prices as the basis for assessment. Furthermore, in this setting we derive a consistent relation between pre-tax and post-tax costs of capital that is compatible with the premise of no-arbitrage by exploiting risk-neutral probabilities.
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