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Capital tax reform and the real economy: the effects of the 2003 dividend tax cut

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  • Danny Yagan

    () (University of California, Berkeley)

Abstract

Policymakers frequently propose to use capital tax reform to stimulate investment and increase labour earnings. This paper tests for such real impacts of the 2003 dividend tax cut? one of the largest reforms ever to a U.S. capital tax rate? using a quasi-experimental design and a large sample of U.S. corporate tax returns from years 1996-2008. I estimate that the tax cut caused zero change in corporate investment, with an upper bound elasticity with respect to one minus the top statutory tax rate of .08 and an upper bound effect size of .03 standard deviations. This null result is robust across speci?cations, samples, and investment measures. I similarly fi?nd no impact on employee compensation. The lack of detectable real effects contrasts with an immediate impact on ?financial payouts to shareholders. Economically, the ?findings challenge leading estimates of the cost-of-capital elasticity of investment, or undermine models in which dividend tax reforms affect the cost of capital. Either way, it may be difficult for policymakers to implement an alternative dividend tax cut that has substantially larger near-term effects.

Suggested Citation

  • Danny Yagan, 2013. "Capital tax reform and the real economy: the effects of the 2003 dividend tax cut," Working Papers 1322, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:1322
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    References listed on IDEAS

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    Cited by:

    1. Juan Carlos Suárez Serrato & Owen Zidar, 2016. "Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 106(9), pages 2582-2624, September.
    2. repec:kap:itaxpf:v:25:y:2018:i:1:d:10.1007_s10797-017-9438-3 is not listed on IDEAS
    3. Michael Cooper & John McClelland & James Pearce & Richard Prisinzano & Joseph Sullivan & Danny Yagan & Owen Zidar & Eric Zwick, 2016. "Business in the United States: Who Owns It, and How Much Tax Do They Pay?," Tax Policy and the Economy, University of Chicago Press, vol. 30(1), pages 91-128.
    4. repec:taf:acctbr:v:46:y:2016:i:7:p:731-759 is not listed on IDEAS
    5. Florian Chatagny & Marko Koethenbuerger & Michael Stimmelmayr, 2017. "Introducing an IP license box in Switzerland: quantifying the effects," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(6), pages 927-961, December.
    6. Annette Alstadsaeter & Wojciech Kopczuk & Kjetil Telle, 2014. "Are Closely Held Firms Tax Shelters?," Tax Policy and the Economy, University of Chicago Press, vol. 28(1), pages 1-32.
    7. Henrekson, Magnus & Sanandaji, Tino, 2016. "Owner-Level Taxes and Business Activity," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 12(1), pages 1-94, March.
    8. Jacob, Martin & Alstadsæter, Annette, 2013. "Payout policies of privately held firms: Flexibility and the role of income taxes," arqus Discussion Papers in Quantitative Tax Research 152, arqus - Arbeitskreis Quantitative Steuerlehre.
    9. Marko Köthenbürger & Michael Stimmelmayr, 2015. "The Efficiency Costs of Dividend Taxation with Managerial Firms," CESifo Working Paper Series 5569, CESifo Group Munich.
    10. Clemens Fuest & Li Liu, 2015. "Does Ownership Affect the Impact of Taxes on Firm Behavior? Evidence from China," CESifo Working Paper Series 5316, CESifo Group Munich.
    11. Alstadsæter, Annette & Jacob, Martin & Michaely, Roni, 2017. "Do dividend taxes affect corporate investment?," Journal of Public Economics, Elsevier, vol. 151(C), pages 74-83.
    12. repec:eee:jfinec:v:125:y:2017:i:1:p:120-142 is not listed on IDEAS
    13. Yongzheng Liu & Jie Mao, 2017. "How do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1716, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    14. Dobridge, Christine L., 2016. "Fiscal Stimulus and Firms: A Tale of Two Recessions," Finance and Economics Discussion Series 2016-13, Board of Governors of the Federal Reserve System (U.S.).
    15. Xavier Giroud & Joshua D. Rauh, 2016. "State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data," Economics Working Papers 16103, Hoover Institution, Stanford University.
    16. Eric Zwick & James Mahon, 2017. "Tax Policy and Heterogeneous Investment Behavior," American Economic Review, American Economic Association, vol. 107(1), pages 217-248, January.
    17. David B. Cashin & Jamie Lenney & Byron F. Lutz & William B. Peterman, 2017. "Fiscal Policy and Aggregate Demand in the U.S. Before, During and Following the Great Recession," Finance and Economics Discussion Series 2017-061, Board of Governors of the Federal Reserve System (U.S.).
    18. 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.
    19. repec:kap:itaxpf:v:25:y:2018:i:4:d:10.1007_s10797-017-9475-y is not listed on IDEAS
    20. Irem Guceri, 2016. "Will the real R&D employees please stand up? Effects of tax breaks on firm level outcomes," Working Papers 1602, Oxford University Centre for Business Taxation.
    21. repec:kap:itaxpf:v:25:y:2018:i:2:d:10.1007_s10797-017-9455-2 is not listed on IDEAS
    22. repec:eee:regeco:v:68:y:2018:i:c:p:84-97 is not listed on IDEAS
    23. Xavier Giroud & Joshua Rauh, 2017. "State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data," Working Papers 17-02, Center for Economic Studies, U.S. Census Bureau.

    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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