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Payout taxes and the allocation of investment

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  • Becker, Bo
  • Jacob, Marcus
  • Jacob, Martin

Abstract

When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). If there are no perfect substitutes for equity finance, payout taxes may therefore have an effect on the investment of firms. High taxes will favor investment by firms who can finance internally. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is “locked in” in profitable firms when payout is heavily taxed. Thus, apart from any level effects, payout taxes change the allocation of capital.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 107 (2013)
Issue (Month): 1 ()
Pages: 1-24

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Handle: RePEc:eee:jfinec:v:107:y:2013:i:1:p:1-24

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Corporate payout; Dividend taxes; Investment allocation;

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Cited by:
  1. Jacob, Martin & Södersten, Jan, 2012. "Mitigating shareholder taxation in small open economies?," Working Paper Series 2012:12, Uppsala University, Department of Economics.
  2. Brandstetter, Laura & Jacob, Martin, 2013. "Do corporate tax cuts increase investments?," arqus Discussion Papers in Quantitative Tax Research 153, arqus - Arbeitskreis Quantitative Steuerlehre.
  3. Annette Alstadsæter & Wojciech Kopczuk & Kjetil Telle, 2013. "Are Closely-Held Firms Tax Shelters?," NBER Working Papers 19609, National Bureau of Economic Research, Inc.
  4. Sebastian Eichfelder & Kerstin Schneider, 2014. "Tax Incentives and Business Investment: Evidence from German Bonus Depreciation," CESifo Working Paper Series 4805, CESifo Group Munich.
  5. Seppo Kari & Jussi Laitila, 2012. "Non-linear dividend tax and dynamics of the firm," Working Papers 41, Government Institute for Economic Research Finland (VATT).

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