Advanced Search
MyIDEAS: Login to save this article or follow this journal

Dividend taxation and intertemporal tax arbitrage

Contents:

Author Info

  • Korinek, Anton
  • Stiglitz, Joseph E.

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6V76-4T84JYJ-1/2/d5bb17746410ecda417f277f7f9308c8
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

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

Volume (Year): 93 (2009)
Issue (Month): 1-2 (February)
Pages: 142-159

as in new window
Handle: RePEc:eee:pubeco:v:93:y:2009:i:1-2:p:142-159

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505578

Related research

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

Other versions of this item:

Find related papers by JEL classification:

References

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.:
as in new window
  1. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers, University of Iowa, Department of Economics 95-05, University of Iowa, Department of Economics.
  2. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, Elsevier, vol. 2(1), pages 1-34, February.
  3. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Journal of Public Economics, Elsevier, Elsevier, vol. 45(3), pages 271-300, August.
  4. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(3), pages 433-46, August.
  5. Jennifer L. Blouin & Jana Smith Raedy & Douglas A. Shackelford, 2004. "Did Dividends Increase Immediately After the 2003 Reduction in Tax Rates?," NBER Working Papers 10301, National Bureau of Economic Research, Inc.
  6. Rajnish Mehra & Edward C. Prescott, 2003. "The Equity Premium in Retrospect," NBER Working Papers 9525, National Bureau of Economic Research, Inc.
  7. DeAngelo, Harry & DeAngelo, Linda, 1990. " Dividend Policy and Financial Distress: An Empirical Investigation of Troubled NYSE Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 45(5), pages 1415-31, December.
  8. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. 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, Elsevier, vol. 13(2), pages 187-221, June.
  10. 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, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
  11. Chetty, Raj & Saez, Emmanuel, 2004. "Dividend Taxes and Corporate Behaviour: Evidence from the 2003 Dividend Tax Cut," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4722, C.E.P.R. Discussion Papers.
  12. Joseph E. Stiglitz, 1972. "Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 3(2), pages 458-482, Autumn.
  13. Alan J. Auerbach & Kevin A. Hassett, 2006. "Dividend Taxes and Firm Valuation: New Evidence," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 119-123, May.
  14. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
  15. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  16. Joseph E. Stiglitz & Aaron S. Edlin, 1997. "Discouraging Rivals: Managerial Rent-Seeking and Economic Inefficiencies," NBER Working Papers 4145, National Bureau of Economic Research, Inc.
  17. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
  18. 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.
  19. Greenwald, Bruce & Stiglitz, Joseph E & Weiss, Andrew, 1984. "Informational Imperfections in the Capital Market and Macroeconomic Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 74(2), pages 194-99, May.
  20. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(2), pages 225-64, April.
  21. Stein, Jeremy C., 1988. "Takeover Threats and Managerial Myopia," Scholarly Articles 3708937, Harvard University Department of Economics.
  22. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, Elsevier, vol. 15(1-2), pages 61-89.
  23. Stiglitz,Joseph & Greenwald,Bruce, 2003. "Towards a New Paradigm in Monetary Economics," Cambridge Books, Cambridge University Press, number 9780521008051, 9.
  24. 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, Elsevier, vol. 69(1), pages 17-48, July.
  25. Baker, G.P. & Jensen, M.C. & Murphy, K.J., 1988. "Compensation And Incentives: Practice Vs. Theory," Papers, Rochester, Business - Managerial Economics Research Center 88-05, Rochester, Business - Managerial Economics Research Center.
  26. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 15(2), pages 145-161, March.
  27. Raj Chetty & Emmanuel Saez, 2006. "The Effects of the 2003 Dividend Tax Cut on Corporate Behavior: Interpreting the Evidence," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 124-129, May.
  28. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  29. Hsuan-Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, American Finance Association, vol. 55(3), pages 1105-1131, 06.
  30. Raj Chetty & Emmanuel Saez, 2007. "An Agency Theory of Dividend Taxation," NBER Working Papers 13538, National Bureau of Economic Research, Inc.
  31. Stiglitz, Joseph E., 1976. "The corporation tax," Journal of Public Economics, Elsevier, Elsevier, vol. 5(3-4), pages 303-311.
  32. Roger Gordon & Martin Dietz, 2006. "Dividends and Taxes," NBER Working Papers 12292, National Bureau of Economic Research, Inc.
  33. 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.
  34. Joseph E. Stiglitz & Anton Korinek, 2008. "Political Economy in a Contestable Democracy: The Case of Dividend Taxation," 2008 Meeting Papers 760, Society for Economic Dynamics.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:93:y:2009:i:1-2:p:142-159. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.