Abstract
This paper analyzes the “Japanese-type” capital gains tax, which before January 2003 was levied on the stock sales price rather than on realized capital gains. We derive the cost of capital under the tax system in various cases, compare the cost of capital with that under the “standard” tax system, and show that which is higher depends not only on various capital income taxes and on the after-tax rate of return to savings, but more on the firm's dividend (or financial) policies. We then show that the capital gains tax has no effect whatsoever on capital accumulation and welfare in the short run.
