Methods of Mitigating Double Taxation

This paper presents a comprehensive overview of existing methods of mitigating double taxation of corporate income within a standard cost of capital model. Two of the most well-known and most utilized methods, the imputation and the split rate systems, do not mitigate double taxation in corporations where the marginal investment is financed with retained earnings. However, all methods are effective when the marginal investment is financed with new share issues. The corporate tax rate, fiscal allowances, allocation to periodization funds and allocation to tax equalization reserves (or allowance for corporate equity) are effective instruments, independent of the sources of financing. The paper also discusses why so many different methods have been employed in mitigating double taxation.