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Taxation and Corporate Payout Policy

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  • James Poterba

Abstract

This paper presents new evidence on how corporate payout policy responds to the differential between the tax burden on dividend income and that on accruing capital gains. It describes the construction of weighted average marginal tax rate series for the period since 1929, and it suggests that the enactment of the Job Growth of Taxpayer Relief Reconciliation Act of 2003 should raise the after-tax value of dividends relative to capital gains by more than five percentage points. The impact of this change on payout depends on the elasticity of dividend payments with respect to the after-tax value of dividend income relative to capital gains. Time series estimates suggest an elasticity of more than three, and imply that the recent tax reform could ultimately increase dividends by almost twenty percent.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 94 (2004)
Issue (Month): 2 (May)
Pages: 171-175

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Handle: RePEc:aea:aecrev:v:94:y:2004:i:2:p:171-175

Note: DOI: 10.1257/0002828041301416
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  1. Auerbach, Alan J. & Hassett, Kevin A., 2003. "On the marginal source of investment funds," Journal of Public Economics, Elsevier, vol. 87(1), pages 205-232, January.
  2. Gravelle, Jane G., 2003. "Effects of Dividend Relief on Economic Growth, the Stock Market, and Corporate Tax Preferences," National Tax Journal, National Tax Association, vol. 56(3), pages 653-72, September.
  3. Alan J. Auerbach, 2001. "Taxation and Corporate Financial Policy," NBER Working Papers 8203, National Bureau of Economic Research, Inc.
  4. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Carroll, Robert & Hassett, Kevin A. & Mackie, James B. III, 2003. "The Effect of Dividend Tax Relief on Investment Incentives," National Tax Journal, National Tax Association, vol. 56(3), pages 629-51, September.
  6. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 455-516.
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