Returns After Personal Tax on UK Equity and Gilts, 1919-98

Abstract

This paper investigates whether personal tax could help explain the size of the historic equity permium in the UK measured before personal tax. If there has been a higher tax burden on equity, some of the premium could be viewed as compensation for tax. We estimate that personal tax reduces the arithmetic mean nominal return on equity from 13.3 per cent to 11.1 per cent pa during 1919-98 and the mean return on gilts from 7.1 per cent to 5.6 per cent pa. Personal tax accounts for a slightly higher proportion of the before-tax return on gilts than on equity, which implies that none of the premium measured before tax can be viewed as compensation for a higher tax burden on equity.