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Dividend and capital gains taxation under incomplete markets

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

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%.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 7 ()
Pages: 599-611

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Handle: RePEc:eee:moneco:v:59:y:2012:i:7:p:599-611
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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