Bernhard Schwetzler, Marc Steffen Rapp

• In his recent article Valuation with or without Personal Income Taxes,"" Richter analyzes the impact of introducing income taxes into the calculus of corporate valuation. His major result is that, if correctly specifying the model, the income tax rate is only of minor importance for corporate values and asset prices. In this note we want to demonstrate that the sensitivity analysis of Richter (2004) has to be treated with some caution and highlight some problems occurring when introducing personal income taxes that are not fully reflected in Richter's analysis. In a first step we show, that presuming that the analysis of Richter (2004) is theoretical correct, it is highly sensitive with respect to the parameters of the dividend process and choosing slightly different parameters suggests opposite conclusions. Second, we show that in general the analysis of taxation effects is characterized by circularity problems, since the empirical as well as the theoretical analysis of Richter requires the assumption that tthe market price of the market portfolio is independent from the tax rate. Our analysis based on a consumption based asset pricing model shows that equilibrium asset prices depend on the income tax rate even if we presume an idealized tax system with uniform tax rates that taxes the economic income. The paper can be downloaded from the Social Science Research Network Electronic Paper Collection.