Advanced Search
MyIDEAS: Login to save this paper or follow this series

An Agency Theory of Dividend Taxation

Contents:

Author Info

  • Raj Chetty
  • Emmanuel Saez

Abstract

Recent empirical studies of dividend taxation have found that: (1) dividend tax cuts cause large, immediate increases in dividend payouts, and (2) the increases are driven by firms with high levels of shareownership among top executives or the board of directors. These findings are inconsistent with existing "old view" and "new view" theories of dividend taxation. We propose a simple alternative theory of dividend taxation in which managers and shareholders have conflicting interests, and show that it can explain the evidence. Using this agency model, we develop an empirically implementable formula for the efficiency cost of dividend taxation. The key determinant of the efficiency cost is the nature of private contracting. If the contract between shareholders and the manager is second-best efficient, deadweight burden follows the standard Harberger formula and is second-order (small) despite the pre-existing distortion of over-investment by the manager. If the contract is second-best inefficient -- as is likely when firms are owned by diffuse shareholders because of incentives to free-ride when monitoring managers -- dividend taxation generates a first-order (large) efficiency cost. An illustrative calibration of the formula using empirical estimates from the 2003 dividend tax reform in the U.S. suggests that the efficiency cost of raising the dividend tax rate could be close to the amount of revenue raised.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w13538.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13538.

as in new window
Length:
Date of creation: Oct 2007
Date of revision:
Publication status: published as Chetty, Raj, and Emmanuel Saez. 2010. "Dividend and Corporate Taxation in an Agency Model of the Firm." American Economic Journal: Economic Policy, 2(3): 1-31. DOI: 10.1257/pol.2.3.1
Handle: RePEc:nbr:nberwo:13538

Note: CF PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Edward C Prescott & Robert M Townsend, 2010. "Pareto Optima and Competitive Equilibria With Adverse Selection and Moral Hazard," Levine's Working Paper Archive 2069, David K. Levine.
  2. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2002. "Dividend Policy inside the Firm," NBER Working Papers 8698, National Bureau of Economic Research, Inc.
  3. Bernheim, B Douglas & Wantz, Adam, 1995. "A Tax-Based Test of the Dividend Signaling Hypothesis," American Economic Review, American Economic Association, American Economic Association, vol. 85(3), pages 532-51, June.
  4. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(3), pages 461-88, June.
  5. Franklin Allen & Antonio E. Bernardo & Ivo Welch, 2000. "A Theory of Dividends Based on Tax Clienteles," Journal of Finance, American Finance Association, American Finance Association, vol. 55(6), pages 2499-2536, December.
  6. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Journal of Public Economics, Elsevier, Elsevier, vol. 45(3), pages 271-300, August.
  7. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 2000. "Agency Problems and Dividend Policies around the World," Journal of Finance, American Finance Association, American Finance Association, vol. 55(1), pages 1-33, 02.
  8. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment," Journal of Finance, American Finance Association, American Finance Association, vol. 55(6), pages 2537-2564, December.
  9. James R. Hines, Jr., 1998. "Three Sides of Harberger Triangles," NBER Working Papers 6852, National Bureau of Economic Research, Inc.
  10. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  11. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
  12. Raghuram Rajan & Henry Servaes & Luigi Zingales, . "The Cost of Diversity: The Diversification Discount and Inefficient Investment," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 463, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  13. James R. Hines Jr., 1991. "Dividends and Profits: Some Unsubtle Foreign Influences," NBER Working Papers 3730, National Bureau of Economic Research, Inc.
  14. Marianne Bertrand & Sendhil Mullainathan, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(5), pages 1043-1075, October.
  15. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  16. Edward C Prescott & Robert M Townsend, 1997. "General Competitive Analysis in an Economy with Private Information," Levine's Working Paper Archive 1578, David K. Levine.
  17. Louis Kaplow, 2006. "Optimal Control of Externalities in the Presence of Income Taxation," NBER Working Papers 12339, National Bureau of Economic Research, Inc.
  18. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 343, Massachusetts Institute of Technology (MIT), Department of Economics.
  19. Lawrence H. Goulder & Roberton C. Williams III, 2003. "The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(4), pages 898-927, August.
  20. Fenn, George W. & Liang, Nellie, 2001. "Corporate payout policy and managerial stock incentives," Journal of Financial Economics, Elsevier, Elsevier, vol. 60(1), pages 45-72, April.
  21. Anton Korinek & Joseph E. Stiglitz, 2008. "Dividend Taxation and Intertemporal Tax Arbitrage," NBER Working Papers 13858, National Bureau of Economic Research, Inc.
  22. Roger Gordon & Martin Dietz, 2006. "Dividends and Taxes," NBER Working Papers 12292, National Bureau of Economic Research, Inc.
  23. B. Douglas Bernheim & Lee S. Redding, 2001. "Optimal Money Burning: Theory and Application to Corporate Dividends," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 10(4), pages 463-507, December.
  24. Feldstein, Martin S, 1970. "Corporate Taxation and Dividend Behaviour," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 37(1), pages 57-72, January.
  25. David F. Bradford, 1979. "The Incidence and Allocation Effects of a Tax on Corporate Distributions," NBER Working Papers 0349, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Lindhe, Tobias & Södersten, Jan, 2013. "Distortive Effects of Dividend Taxation," Working Paper Series, Center for Fiscal Studies, Uppsala University, Department of Economics 2013:9, Uppsala University, Department of Economics.
  2. Saez, Emmanuel & Chetty, Raj, 2010. "Dividend and Corporate Taxation in an Agency Model of the Firm," Scholarly Articles 9748526, Harvard University Department of Economics.
  3. Anton Korinek & Joseph E. Stiglitz, 2008. "Dividend Taxation and Intertemporal Tax Arbitrage," NBER Working Papers 13858, National Bureau of Economic Research, Inc.
  4. Seppo Kari & Hanna Karikallio & Jukka Pirttilä, 2009. "The impact of dividend taxation on dividends and investment: New evidence based on a natural experiment," Working Papers, Government Institute for Economic Research Finland (VATT) 9, Government Institute for Economic Research Finland (VATT).
  5. Annette Alstadsæter & Erik Fjaerli, 2009. "Neutral Taxation of Shareholder Income? Corporate Responses to an Announced Dividend Tax," CESifo Working Paper Series 2530, CESifo Group Munich.
  6. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 50(1), pages 3-50, March.
  7. Henrekson, Magnus & Sanandaji, Tino, 2008. "Entrepreneurship and the Theory of Taxation," Working Paper Series, Research Institute of Industrial Economics 732, Research Institute of Industrial Economics, revised 19 Aug 2009.
  8. Jennifer L. Blouin & Jana Smith Raedy & Douglas A. Shackelford, 2007. "Did Firms Substitute Dividends for Share Repurchases after the 2003 Reductions in Shareholder Tax Rates?," NBER Working Papers 13601, National Bureau of Economic Research, Inc.
  9. Jennifer Blouin & Jana Raedy & Douglas Shackelford, 2010. "Dividends, Share Repurchases, and Tax Clienteles: Evidence from the 2003 Reductions in Shareholder Taxes," NBER Working Papers 16129, National Bureau of Economic Research, Inc.
  10. Jesse Edgerton, 2010. "Effects of the 2003 dividend tax cut: evidence from real estate investment trusts," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-34, Board of Governors of the Federal Reserve System (U.S.).
  11. Marko Köthenbürger & Michael Stimmelmayr, 2009. "Corporate Taxation and Corporate Governance," CESifo Working Paper Series 2881, CESifo Group Munich.
  12. Lindhe, Tobias & Södersten, Jan, 2013. "Distortive Effects of Dividend Taxation," Working Paper Series, Uppsala University, Department of Economics 2013:16, Uppsala University, Department of Economics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:13538. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.