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Dividend taxation and intertemporal tax arbitrage

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  • Korinek, Anton
  • Stiglitz, Joseph E.

Abstract

We analyze the effects of changes in dividend tax policy using a life-cycle model of the firm, in which new firms first access equity markets, then grow internally, and finally pay dividends when they have reached steady state. We find that unanticipated permanent changes in tax rates have only small effects on aggregate investment, since macroeconomic dynamics are dominated by mature firms for which dividend taxation is not distortionary. Anticipated or temporary dividend tax changes, on the other hand, create incentives for firms to engage in inter-temporal tax arbitrage so as to reduce investors' tax burden. For example, a temporary tax cut - the type most likely to be enacted by policymakers - induces firms to accelerate dividend payments while tax rates are low, which reduces their cash holdings and makes them capital-constrained when large investment opportunities arise. This can significantly lower aggregate investment for periods after the tax cut.

Suggested Citation

  • Korinek, Anton & Stiglitz, Joseph E., 2009. "Dividend taxation and intertemporal tax arbitrage," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 142-159, February.
  • Handle: RePEc:eee:pubeco:v:93:y:2009:i:1-2:p:142-159
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    More about this item

    Keywords

    Dividend taxation Capital constraints Aggregate investment Political economy of taxation;

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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