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A Schumpeterian Analysis of Deficit-Financed Dividend Tax Cuts

Author

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  • Pietro F. Peretto

Abstract

I propose a Schumpeterian analysis of the growth and welfare effects of a deficit-financed cut of the tax rate on distributed dividends. I find that income per capita growth initially accelerates and then decelerates, eventually converging to a long-run value lower than the starting one. Interestingly, lower steady-state growth occurs despite the fact that - in line with intuition - the economy's saving ratio rises. Most importantly, I find that the policy's effect on welfare is negative. The mechanism that delivers these results is that taxes on distributed dividends affect differently the returns to investing in the growth of existing product lines and in the development of new product lines, and thus reallocate resources across activities that have different growth opportunity. The analysis is particularly relevant to the current debate about the Job Growth and Taxpayer Relief reconciliation Act of 2003 (JGTRRA), a real-world large-scale experiment in fiscal policy. A surprising implication is that the JGTRRA targeted the wrong tax rate: Holding the financing method (debt) equal, it should have cut the tax rate on corporate income, thereby reducing the distortions of the internal investment decisions of firms and improving growth and welfare.

Suggested Citation

  • Pietro F. Peretto, 2010. "A Schumpeterian Analysis of Deficit-Financed Dividend Tax Cuts," Working Papers 10-19, Duke University, Department of Economics.
  • Handle: RePEc:duk:dukeec:10-19
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    Cited by:

    1. John Dawson & John Seater, 2013. "Federal regulation and aggregate economic growth," Journal of Economic Growth, Springer, vol. 18(2), pages 137-177, June.

    More about this item

    Keywords

    Endogenous Growth; Market Structure; Dividends; Corporate Taxation;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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