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Dividend and capital gains taxation under incomplete markets

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  • Anagnostopoulos, Alexis
  • Cárceles-Poveda, Eva
  • Lin, Danmo

Abstract

Motivated by the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003, the effects of capital income tax cuts are investigated in an economy with heterogeneous households and a representative, mature firm. Dividend tax cuts, contrary to capital gains tax cuts, lead to a decrease in investment and capital. This is because they increase the market value of existing capital and households require a higher return to hold this additional wealth. In line with empirical evidence, the model predicts substantial increases in dividends and stock prices. Overall, the tax cuts lead to a welfare reduction equivalent to a consumption drop of 0.5%.

Suggested Citation

  • Anagnostopoulos, Alexis & Cárceles-Poveda, Eva & Lin, Danmo, 2012. "Dividend and capital gains taxation under incomplete markets," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 599-611.
  • Handle: RePEc:eee:moneco:v:59:y:2012:i:7:p:599-611
    DOI: 10.1016/j.jmoneco.2012.06.007
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    Citations

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    Cited by:

    1. Anagnostopoulos, Alexis & Li, Qian, 2013. "Consumption taxes and precautionary savings," Economics Letters, Elsevier, vol. 119(3), pages 238-242.
    2. Strulik, Holger & Trimborn, Timo, 2012. "Laffer strikes again: Dynamic scoring of capital taxes," European Economic Review, Elsevier, vol. 56(6), pages 1180-1199.
    3. Orhan Atesagaoglu & Eva Carceles-Poveda & Alexis Anagnostopoulos, 2014. "Capital Income Taxation with Household and Firm Heterogeneity," 2014 Meeting Papers 525, Society for Economic Dynamics.
    4. William Gavin & Benjamin Keen & Finn Kydland, 2015. "Monetary Policy, the Tax Code, and the Real Effects of Energy Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 694-707, July.
    5. Alexis Anagnostopoulos & Eva Carceles-Poveda & Yair Tauman, 2016. "Value Preserving Welfare Weights for Social Optimization Problems," Department of Economics Working Papers 16-06, Stony Brook University, Department of Economics.
    6. Alexis Anagnostopoulos & Orhan Erem Atesagaoglu & Eva Carceles-Poveda, 2014. "On the Double Taxation of Corporate Profits," Department of Economics Working Papers 14-03, Stony Brook University, Department of Economics.
    7. Chen, Daphne & Qi, Shi & Schlagenhauf, Don E., 2014. "Corporate income tax, legal form of organization, and employment," Working Papers 2014-18, Federal Reserve Bank of St. Louis.
    8. Winter, Christoph & Kraus, Beatrice, 2016. "Do Tax Changes Affect Credit Markets and Financial Frictions? Evidence from Credit Spreads," Annual Conference 2016 (Augsburg): Demographic Change 145636, Verein für Socialpolitik / German Economic Association.
    9. Conesa, Juan C. & Domínguez, Begoña, 2013. "Intangible investment and Ramsey capital taxation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 983-995.

    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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