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Dividend taxation and intertemporal tax arbitrage

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Author Info
Korinek, Anton
Stiglitz, Joseph E.

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Abstract

We analyze the effects of changes in dividend tax policy using a life-cycle model of the firm, in which new firms first access equity markets, then grow internally, and finally pay dividends when they have reached steady state. We find that unanticipated permanent changes in tax rates have only small effects on aggregate investment, since macroeconomic dynamics are dominated by mature firms for which dividend taxation is not distortionary. Anticipated or temporary dividend tax changes, on the other hand, create incentives for firms to engage in inter-temporal tax arbitrage so as to reduce investors' tax burden. For example, a temporary tax cut - the type most likely to be enacted by policymakers - induces firms to accelerate dividend payments while tax rates are low, which reduces their cash holdings and makes them capital-constrained when large investment opportunities arise. This can significantly lower aggregate investment for periods after the tax cut.

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Publisher Info
Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 93 (2009)
Issue (Month): 1-2 (February)
Pages: 142-159
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Handle: RePEc:eee:pubeco:v:93:y:2009:i:1-2:p:142-159

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Web page: http://www.elsevier.com/locate/inca/505578

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Related research
Keywords: Dividend taxation Capital constraints Aggregate investment Political economy of taxation;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Journal of Public Economics, Elsevier, vol. 45(3), pages 271-300, August. [Downloadable!] (restricted)
    Other versions:
  2. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Raj Chetty & Emmanuel Saez, 2007. "An Agency Theory of Dividend Taxation," NBER Working Papers 13538, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May. [Downloadable!] (restricted)
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  6. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  7. Roger Gordon & Martin Dietz, 2006. "Dividends and Taxes," NBER Working Papers 12292, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring. [Downloadable!] (restricted)
  10. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June. [Downloadable!] (restricted)
  11. DeAngelo, Harry & DeAngelo, Linda, 1990. " Dividend Policy and Financial Distress: An Empirical Investigation of Troubled NYSE Firms," Journal of Finance, American Finance Association, vol. 45(5), pages 1415-31, December. [Downloadable!] (restricted)
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  13. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring. [Downloadable!] (restricted)
  14. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  15. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, vol. 2(1), pages 1-34, February. [Downloadable!] (restricted)
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  17. Rajnish Mehra & Edward C. Prescott, 2003. "The Equity Premium in Retrospect," NBER Working Papers 9525, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Edlin, Aaron S & Stiglitz, Joseph E, 1995. "Discouraging Rivals: Managerial Rent-Seeking and Economic Inefficiencies," American Economic Review, American Economic Association, vol. 85(5), pages 1301-12, December. [Downloadable!] (restricted)
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  19. Greenwald, Bruce & Stiglitz, Joseph E & Weiss, Andrew, 1984. "Informational Imperfections in the Capital Market and Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 74(2), pages 194-99, May. [Downloadable!] (restricted)
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  20. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  21. Alvarez, Luis H. R. & Kanniainen, Vesa & Sodersten, Jan, 1998. "Tax policy uncertainty and corporate investment: A theory of tax-induced investment spurts," Journal of Public Economics, Elsevier, vol. 69(1), pages 17-48, July. [Downloadable!] (restricted)
  22. Stiglitz, Joseph E., 1976. "The corporation tax," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 303-311. [Downloadable!] (restricted)
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  24. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89. [Downloadable!] (restricted)
  25. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April. [Downloadable!] (restricted)
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  26. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 433-46, August. [Downloadable!] (restricted)
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  27. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Seppo Kari & Hanna Karikallio & Pirttilä & Jukka, 2008. "Anticipating Tax Changes: Evidence from the Finnish Corporate Income Tax Reform of 2005," Discussion Papers 447, Government Institute for Economic Research Finland (VATT). [Downloadable!]
    Other versions:
  2. Raj Chetty & Emmanuel Saez, 2007. "An Agency Theory of Dividend Taxation," NBER Working Papers 13538, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Annette Alstadsæter & Erik Fjaerli, 2009. "Neutral Taxation of Shareholder Income? Corporate Responses to an Announced Dividend Tax," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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