Dividend Taxes and the Limits of the New View

The new view of dividend taxation bundles three logically distinct claims: capitalisation, that a permanent dividend tax is impounded in share values; the Auerbach prediction, that the firm's real retention and investment decision is unchanged; and the King criterion, that the tax does not enter the cost of capital. In a frictionless two-period general-equilibrium economy with an all-equity firm and a power production technology, we show that the three claims hold under progressively stronger conditions. Capitalisation always holds, since the tax cancels from the firm's investment first-order condition, and in partial equilibrium Fisher separation delivers the new view in full. The failures are general-equilibrium phenomena that sort by margin: a subsistence level of consumption in otherwise standard HARA preferences breaks the Auerbach prediction for any technology, whereas the King criterion fails only when returns to capital are also decreasing, with a magnitude proportional to the product of technological curvature and the subsistence level. These breaks are uncompensated income effects, not substitution distortions: a revenue-neutral lump-sum rebate restores neutrality for any preferences and any technology. No friction is needed, only the curvature of preferences and technology and the breakdown of Fisher separation when the firm is the sole store of value. The all-equity assumption is inessential; under risk, by contrast, an asymmetric loss offset distorts the price of risk, a substitution distortion that no lump-sum rebate can repair.