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A Schumpeterian Analysis of Deficit-Financed Dividend Tax Cuts

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  • Pietro F. Peretto

Abstract

I propose a Schumpeterian analysis of the growth and welfare effects of a deficit-financed cut of the tax rate on distributed dividends. I find that income per capita growth initially accelerates and then decelerates, eventually converging to a long-run value lower than the starting one. Interestingly, lower steady-state growth occurs despite the fact that - in line with intuition - the economy's saving ratio rises. Most importantly, I find that the policy's effect on welfare is negative. The mechanism that delivers these results is that taxes on distributed dividends affect differently the returns to investing in the growth of existing product lines and in the development of new product lines, and thus reallocate resources across activities that have different growth opportunity. The analysis is particularly relevant to the current debate about the Job Growth and Taxpayer Relief reconciliation Act of 2003 (JGTRRA), a real-world large-scale experiment in fiscal policy. A surprising implication is that the JGTRRA targeted the wrong tax rate: Holding the financing method (debt) equal, it should have cut the tax rate on corporate income, thereby reducing the distortions of the internal investment decisions of firms and improving growth and welfare.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 10-19.

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Length: 41
Date of creation: 2010
Date of revision:
Handle: RePEc:duk:dukeec:10-19

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Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/

Related research

Keywords: Endogenous Growth; Market Structure; Dividends; Corporate Taxation;

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Cited by:
  1. John W. Dawson & John J. Seater, 2009. "Federal Regulation and Aggregate Economic Growth," Working Papers 09-02, Department of Economics, Appalachian State University.

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