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Dividend and Capital Gains Taxation in a Cross-Section of Firms

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  • Martin D. Dietz

    (University of St. Gallen, Institut fur Finanzwirtschaft und Finanzrecht IFF-HSG)

Abstract

I reconsider the effect of capital income taxation on firm size and firm growth by embedding the nucleus theory of firm development of Sinn (1991) into a framework of monopolistic competition with new firm creation. In a turnover of firms, firm destruction is counterbalanced by a permanent creation of new firms. Young firms are set up using an initial capital infusion of new equity and undergo an intermediate stage of internal growth until they finally reach a steady payout stage. The cross-section then contains firms of all ages and development stages. Dividend and capital gains tax have important effects on initial firm size and growth but also on the creation of new firms and thus on diversity in the economy. First, a differential treatment of dividends and capital gains introduces a distortion in the allocation of capital across firms. Second, dividend as well as capital gains tax are anticipated at the start-up stage of firms. While leaving the firm specific capital stock unaffected, the capitalisation is shown to depress firm creation and aggregate capital accumulation.

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Bibliographic Info

Paper provided by EconWPA in its series Public Economics with number 0405004.

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Length: 28 pages
Date of creation: 13 May 2004
Date of revision:
Handle: RePEc:wpa:wuwppe:0405004

Note: Type of Document - pdf; pages: 28
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Web page: http://128.118.178.162

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Keywords: capital income taxation; investment; firm creation; aggregate production.;

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Citations

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Cited by:
  1. Roger Gordon & Martin Dietz, 2006. "Dividends and Taxes," NBER Working Papers 12292, National Bureau of Economic Research, Inc.
  2. Douhan, Robin & Henrekson, Magnus, 2007. "The Political Economy of Entrepreneurship," Working Paper Series 716, Research Institute of Industrial Economics.
  3. Christian Keuschnigg & Martin Dietz, 2007. "A growth oriented dual income tax," International Tax and Public Finance, Springer, vol. 14(2), pages 191-221, April.
  4. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2005. "The Start-Up and Growth Stages in Enterprise Formation: The “New View” of Dividend Taxation Reconsidered," CESifo Working Paper Series 1476, CESifo Group Munich.
  5. Seppo Kari & Vesa Kanniainen & Jouko Ylä-Liedenpohja, 2007. "Nordic Dual Income Taxation of Entrepreneurs," Discussion Papers 415, Government Institute for Economic Research Finland (VATT).
  6. Seppo Kari & Jussi Laitila, 2012. "Non-linear dividend tax and dynamics of the firm," Working Papers 41, Government Institute for Economic Research Finland (VATT).

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