Gross or net? The role of taxation in the history of equity valuation

Abstract

This article explores the relationship between taxation and investment analysis technique for both the USA and the UK in the nineteenth and twentieth centuries. The article argues that the complexity of the British tax system, its emphasis on dividend payout rather than total return, the overlap between corporate and personal taxation, and the variation in methods of accounting for taxation in corporate accounts, all contributed to a concentration on dividend rather than earnings valuation metrics. In particular, the Price Earnings Ratio was not used in the UK until after 1965 whereas, in the USA, the simpler classical taxation system facilitated the use of the Price Earnings Ratio as a valuation metric as early as the 1920s.