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Dividend and Corporate Taxation in an Agency Model of the Firm

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Author Info

  • Raj Chetty
  • Emmanuel Saez

Abstract

Recent evidence on the effect of dividend taxes on firm behavior is inconsistent with neoclassical theories of dividend and corporate taxation. We develop a simple agency model in which managers and shareholders have conflicting interests to explain the evidence. In this model, dividend taxation induces managers to undertake unproductive investments by retaining earnings, and creates a first-order deadweight cost. In contrast, corporate taxes do not distort the manager's payout decision and may only create second-order efficiency costs. Corporate income taxation may therefore be a more efficient way to generate revenue than dividend taxation, challenging existing intuitions based on neoclassical models. (JEL D21, G35, H25, H32)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.2.3.1
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 2 (2010)
Issue (Month): 3 (August)
Pages: 1-31

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Handle: RePEc:aea:aejpol:v:2:y:2010:i:3:p:1-31

Note: DOI: 10.1257/pol.2.3.1
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Cited by:
  1. Marko Köthenbürger & Michael Stimmelmayr, 2009. "Corporate Taxation and Corporate Governance," CESifo Working Paper Series 2881, CESifo Group Munich.
  2. Christian Keuschnigg & Evelyn Ribi, 2010. "Business Taxation, Corporate Finance and Economic Performance," University of St. Gallen Department of Economics working paper series 2010 2010-04, Department of Economics, University of St. Gallen.
  3. Seppo Kari & Jussi Laitila, 2012. "Non-linear dividend tax and dynamics of the firm," Working Papers 41, Government Institute for Economic Research Finland (VATT).
  4. Christian Keuschnigg & Evelyn Ribi, 2010. "Profit Taxation, Innovation and the Financing of Heterogeneous Firms," University of St. Gallen Department of Economics working paper series 2010 2010-01, Department of Economics, University of St. Gallen.

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