Inflation, Taxation and the Valuation of Shares

Abstract

Abstract A share valuation model is developed that takes account of the possibility of shareholding periods extending beyond one year, income taxes, capital gains taxes paid on realised gains and indexation for inflation. For an infinite dividend series, an optimal shareholding period is derived, which is shown to be related to the level of the after-tax risky rate, discounted at the growth rate, vis-a-vis the after-tax riskless rate, deflated for the general rate of inflation. In turn, this determines whether or not the value of the share is indifferent to the capital gains tax rate and the rate of inflation.