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Fiscal Financing and Investment Irreversibility

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  • Matteo F. Ghilardi
  • Roy Zilberman

Abstract

We examine the macroeconomic, asset pricing, and public debt consequences of deficit-financing dividend taxation in a dynamic general equilibrium model featuring partial investment irreversibility. Dividend taxes interact directly with the occasionally-binding irreversibility constraint, generating tax-augmented user-cost and hangover channels that both shape investment and debt-to-output fluctuations and account for a sizeable share of their long-run volatilities. Our analysis further reveals that debt-offsetting dividend tax hikes initially trigger investment inactivity through higher user-costs, followed by a surge driven by intertemporal tax arbitrage and hangover effects. Finally, debt-driven dividend tax rules amplify asset price fluctuations while delivering only modest fiscal revenue changes.

Suggested Citation

  • Matteo F. Ghilardi & Roy Zilberman, 2025. "Fiscal Financing and Investment Irreversibility," Working Papers 422913074, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:422913074
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    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/GZ_IMF_WP.pdf
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