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Abstract

This paper presents new evidence on how corporate payout policy responds to the differential between the tax burden on dividend income and that on accruing capital gains. It describes the construction of weighted average marginal tax rate series for the period since 1929, and it suggests that the enactment of the Job Growth of Taxpayer Relief Reconciliation Act of 2003 should raise the after-tax value of dividends relative to capital gains by more than five percentage points. The impact of this change on payout depends on the elasticity of dividend payments with respect to the after-tax value of dividend income relative to capital gains. Time series estimates suggest an elasticity of more than three, and imply that the recent tax reform could ultimately increase dividends by almost twenty percent.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10321.

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Date of creation: Feb 2004
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Handle: RePEc:nbr:nberwo:10321

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Find related papers by JEL classification:

• H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
• H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

This paper has been announced in the following NEP Reports:

• NEP-ALL-2004-02-29 (All new papers)
• NEP-PBE-2004-02-29 (Public Economics)
• NEP-PUB-2004-02-29 (Public Finance)

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1. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292 Elsevier.
   
   • Alan J. Auerbach, 2001. "Taxation and Corporate Financial Policy," NBER Working Papers 8203, National Bureau of Economic Research, Inc.
2. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
   
   • James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
3. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 455-516.
   
   • James M. Poterba, 1987. "Tax Policy and Corporate Saving," Working papers 470, Massachusetts Institute of Technology (MIT), Department of Economics.
4. Alan J. Auerbach & Kevin A. Hassett, 2000. "On the Marginal Source of Investment Funds," NBER Working Papers 7821, National Bureau of Economic Research, Inc.
   
   • Auerbach, Alan J. & Hassett, Kevin A., 2003. "On the marginal source of investment funds," Journal of Public Economics, Elsevier, vol. 87(1), pages 205-232, January.

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