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The Economic Effects of Dividend Taxation

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  • James M. Poterba
  • Lawrence H. Summers

Abstract

This paper tests several competing hypotheses about the economic effects of dividend taxation. It employs British data on security returns, dividend payout rates, and corporate investment, because unlike the United States, Britain has experienced several major dividend tax reforms in the last three decades. These tax changes provide an ideal natural experiment for analyzing the effects of dividend taxes. We compare three different views of how dividend taxes affect decisions by firms and their shareholders. We reject the"tax capitalization" view that dividend taxes are non-distortionary lump sum taxes on the owners of corporate capital. We also reject the hypothes is that firms pay dividends because marginal investors are effectively untaxed. We find that the traditional view that dividend taxes constitute a "double-tax" on corporate capital income is most consistent with our empirical evidence. Our results suggest that dividend taxes reduce corporate investment and exacerbate distortions in the intersectoral and intertemporal allocation of capital.
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Suggested Citation

  • James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
    • Handle: RePEc:mit:worpap:343
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