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Transitional Dynamics of Dividend and Capital Gains Tax Cuts

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  • Francois Gourio

    (Boston University)

  • Jianjun Miao

    (Boston University)

Abstract

We develop a dynamic general equilibrium model to study the impact of the 2003 dividend and capital gains tax cuts. In the model, firms are heterogeneous in productivity and make investment and financing decisions subject to capital adjustment costs, equity issuance costs, and collateral constraints. We show that when the dividend and capital gains tax cuts are unexpected and permanent, dividend payments, equity issuance, and aggregate investment rise immediately. By contrast, when these tax cuts are unexpected and temporary, aggregate investment falls in the short run. This fall allows firms to distribute large dividends initially in response to the temporary dividend tax cut. We also find that the effects of a temporary dividend tax cut are very different from those of a temporary capital gains tax cut. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2010.06.002
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 14 (2011)
Issue (Month): 2 (April)
Pages: 368-383

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Handle: RePEc:red:issued:08-187

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Keywords: Capital gains tax; Dividend tax policies; Investment and financial policies; Finance regimes; Collateral constraint; Intertemporal tax arbitrage;

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Cited by:
  1. Alexis Anagnostopoulos & Eva Carceles-Poveda, 2010. "Dividend and Capital Gains Taxation under Incomplete Markets," Department of Economics Working Papers, Stony Brook University, Department of Economics 10-06, Stony Brook University, Department of Economics.
  2. Kizuku Takao, 2014. "Dynamic effects of anticipated and temporary tax changes in a R&D-Based growth model," Discussion Papers in Economics and Business, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) 14-10, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).

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