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End of double taxation: Is the policy better when announced?

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  • Ahmad, Nazneen
  • Xiao, Wei

Abstract

This paper examines the effectiveness of the “end of double taxation” (on dividends) policy in stabilizing an economy. Both announced and unannounced policies are considered. A reduction in double taxation stimulates investment and improves welfare, but its impact on output is moderate and it has a negative effect on work hours. A temporary cut creates an investment boom but also generates an investment slump when the tax cut expires. Announcements of future tax cuts are found to have important effect on output dynamics. Agents respond to the tax policy even before it is implemented. If the tax cut is announced to be temporary, its impact on output is greatly reduced. Our study suggests that a temporary dividend tax cut is most effective in stabilizing a recession stricken economy when the policy change comes as “news” to the economy.

Suggested Citation

  • Ahmad, Nazneen & Xiao, Wei, 2013. "End of double taxation: Is the policy better when announced?," Journal of Policy Modeling, Elsevier, vol. 35(6), pages 928-942.
  • Handle: RePEc:eee:jpolmo:v:35:y:2013:i:6:p:928-942
    DOI: 10.1016/j.jpolmod.2012.12.004
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    References listed on IDEAS

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    Cited by:

    1. Karpavičius, Sigitas & Yu, Fan, 2016. "Should interest expenses be tax deductible?," Economic Modelling, Elsevier, vol. 54(C), pages 100-116.

    More about this item

    Keywords

    Double taxation policy; News and business cycles; Capital-income tax;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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