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End of double taxation: Is the policy better when announced?

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  • Ahmad, Nazneen
  • Xiao, Wei
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    Abstract

    This paper examines the effectiveness of the “end of double taxation” (on dividends) policy in stabilizing an economy. Both announced and unannounced policies are considered. A reduction in double taxation stimulates investment and improves welfare, but its impact on output is moderate and it has a negative effect on work hours. A temporary cut creates an investment boom but also generates an investment slump when the tax cut expires. Announcements of future tax cuts are found to have important effect on output dynamics. Agents respond to the tax policy even before it is implemented. If the tax cut is announced to be temporary, its impact on output is greatly reduced. Our study suggests that a temporary dividend tax cut is most effective in stabilizing a recession stricken economy when the policy change comes as “news” to the economy.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Policy Modeling.

    Volume (Year): 35 (2013)
    Issue (Month): 6 ()
    Pages: 928-942

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    Handle: RePEc:eee:jpolmo:v:35:y:2013:i:6:p:928-942

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    Web page: http://www.elsevier.com/locate/inca/505735

    Related research

    Keywords: Double taxation policy; News and business cycles; Capital-income tax;

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    1. Steven P. Cassou & Kevin J. Lansing, 2004. "Growth Effects of Shifting from a Graduated-rate Tax System to a Flat Tax," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 194-213, April.
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    11. Kapopoulos, Panayotis, 2004. "When can fiscal consolidation be expansionary? Evidence from a small open economy," Journal of Policy Modeling, Elsevier, vol. 26(8-9), pages 1031-1043, December.
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    13. Michael B. Devereux & David R. F. Love, 1994. "The Effects of Factor Taxation in a Two-Sector Model of Endogenous Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 509-36, August.
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