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

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  • 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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Bibliographic 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
Date of revision:
Handle: RePEc:bos:wpaper:wp2006-053

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

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Cited by:
  1. Antonio Falato & Dalida Kadyrzhanova & Jae W. Sim, 2013. "Rising intangible capital, shrinking debt capacity, and the US corporate savings glut," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-67, Board of Governors of the Federal Reserve System (U.S.).
  2. Viktoria Hnatkovska & Roc Armenter, 2012. "The Macroeconomics of Firms' Savings," 2012 Meeting Papers, Society for Economic Dynamics 803, Society for Economic Dynamics.
  3. Marika Santoro & Chao Wei, 2011. "Taxation, Investment and Asset Pricing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 443-454, July.
  4. Juan Sebastián Amador Torres & José EDuardo Gómez G. & Andrés Murcia Pabón, 2013. "Loans Growth and Banks’ Risk: New Evidence," Borradores de Economia 763, Banco de la Republica de Colombia.
  5. Strulik, Holger & Trimborn, Timo, 2012. "Laffer strikes again: Dynamic scoring of capital taxes," European Economic Review, Elsevier, vol. 56(6), pages 1180-1199.
  6. 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.
  7. Francois Gourio & Jianjun Miao, 2011. "Transitional Dynamics of Dividend and Capital Gains Tax Cuts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 368-383, April.
  8. Jason M. DeBacker, 2011. "Capital Taxes with Real and Financial Frictions," Working Papers 201402, Middle Tennessee State University, Department of Economics and Finance.
  9. Shalini Mitra, 2012. "Does Financial Development Cause Higher Firm Volatility and Lower Aggregate Volatility?," Working papers 2012-07, University of Connecticut, Department of Economics.
  10. Loukas Karabarbounis & Brent Neiman, 2012. "Declining Labor Shares and the Global Rise of Corporate Saving," NBER Working Papers 18154, National Bureau of Economic Research, Inc.
  11. Conesa, Juan C. & Domínguez, Begoña, 2013. "Intangible investment and Ramsey capital taxation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(8), pages 983-995.
  12. Seppo Kari & Jussi Laitila, 2012. "Non-linear dividend tax and dynamics of the firm," Working Papers 41, Government Institute for Economic Research Finland (VATT).
  13. Strulik, Holger & Trimborn, Timo, 2010. "Anticipated tax reforms and temporary tax cuts: A general equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(10), pages 2141-2158, October.

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