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Firm Heterogeneity and the Long-Run Effects of Dividend Tax Reform

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Author Info
Francois Gourio () (Department of Economics, Boston University)
Jianjun Miao () (Department of Economics, Boston University)
Abstract

What is the long-run effect of dividend taxation on aggregate capital accumulation? To address this question, we build a dynamic general equilibrium model in which there is a continuum of firms subject to idiosyncratic productivity shocks. This firm heterogeneity generates a cross-sectional distribution of firms, with some firms behaving according to the traditional view of dividend taxation and other firms behaving according to the new view of dividend taxation. Specically, at any point in time, a firm may lie in one of three finance regimes: dividend distribution regime, liquidity constrained regime, and equity issuance regime. These finance regimes may change over time in response to idiosyncratic productivity shocks. Firms in different finance regimes respond to dividend taxation in different ways. Our model simulations show that when both dividend and capital gains tax rates are cut from 25 and 20 percent, respectively, to the same 15 percent level permanently, the aggregate long-run capital stock increases by about 3 percent.

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Publisher Info
Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-053.

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Length: 44pages
Date of creation: Nov 2006
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Handle: RePEc:bos:wpaper:wp2006-053

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Related research
Keywords: firm heterogeneity; general equilibrium; finance regime; the traditional and new view of dividend taxation;

Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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