Dividend Taxes, Corporate Investment, and "Q"
Taxes on corporate distributions have traditionally been regarded as a "double tax" on corporate income. This view implies that while the total effective tax rate on corporate source income affects real economic decisions, the distribution of this tax burden between the shareholders and the corporation is irrelevant. Recent research has suggested an alter- native to this traditional view. One explanation of why firms in the U.S. pay dividends in spite of the heavy tax liabilities associated with this form of distribution is that the stock market capitalizes the tax payments associated with corporate distributions. This capitalization leaves investors indifferent at the margin between corporations paying our dividends and retaining earnings. This alternative view holds that while changes in the dividend tax rate will affect shareholder wealth, they will have no impact on corporate investment decisions. This paper develops econometric tests which distinguish between these two views of dividend taxation. By extending Tobin's "q" theory of investment to incorporate taxes at both the corporate and personal levels, the implications of each view for corporate investment decisions can be derived. The competing views may be tested by comparing the performance of investment equations estimates under each theory's predict ions. British time series data are particularly appropriate for testing hypotheses about dividend taxes because of the substantial postwar variation in effective tax rates on corporate distributions. The econometric results suggest that dividend taxes have important effects on investment decisions.
|Date of creation:||Dec 1981|
|Publication status:||published as Poterba, James M. and Lawrence H. Summers. "Dividend Taxes, Corporate Investment, and 'Q'." Journal of Public Economics, Vol. 22, (1983), pp. 135-167.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael Salinger & Lawrence H. Summers, 1983.
"Tax Reform and Corporate Investment: A Microeconometric Simulation Study,"
NBER Chapters,in: Behavioral Simulation Methods in Tax Policy Analysis, pages 247-288
National Bureau of Economic Research, Inc.
- Michael A. Salinger & Lawrence H. Summers, 1981. "Tax Reform and Corporate Investment: A Microeconometric Simulation Study," NBER Working Papers 0757, National Bureau of Economic Research, Inc.
- M. H. Pesaran, 1974. "On the General Problem of Model Selection," Review of Economic Studies, Oxford University Press, vol. 41(2), pages 153-171.
- Michael Rothschild, 1971. "On the Cost of Adjustment," The Quarterly Journal of Economics, Oxford University Press, vol. 85(4), pages 605-622.
- Zellner, Arnold, 1981. "Posterior odds ratios for regression hypotheses : General considerations and some specific results," Journal of Econometrics, Elsevier, vol. 16(1), pages 151-152, May.
- Engle, Robert F & Foley, Duncan K, 1975. "An Asset Price Model of Aggregate Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(3), pages 625-647, October.
- Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
- David F. Bradford, 1979. "The Incidence and Allocation Effects of a Tax on Corporate Distributions," NBER Working Papers 0349, National Bureau of Economic Research, Inc.
- Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
- Fair, Ray C, 1970. "The Estimation of Simultaneous Equation Models with Lagged Endogenous Variables and First Order Serially Correlated Errors," Econometrica, Econometric Society, vol. 38(3), pages 507-516, May.
- Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
- Alan J. Auerbach, 1980. "Share Valuation and Corporate Equity Policy," NBER Working Papers 0255, National Bureau of Economic Research, Inc.
- Amemiya, Takeshi, 1974. "The nonlinear two-stage least-squares estimator," Journal of Econometrics, Elsevier, vol. 2(2), pages 105-110, July.
- Feldstein, Martin & Green, Jerry, 1983. "Why Do Companies Pay Dividends?," American Economic Review, American Economic Association, vol. 73(1), pages 17-30, March.
- Martin Feldstein & Jerry Green, 1979. "Why Do Companies Pay Dividends?," NBER Working Papers 0413, National Bureau of Economic Research, Inc.
- Feldstein, Martin & Green, Jerry, 1983. "Why Do Companies Pay Dividends?," Scholarly Articles 3204679, Harvard University Department of Economics.
- Engle, Robert F, 1974. "Band Spectrum Regression," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(1), pages 1-11, February.
- R. F. Engle, 1972. "Band Spectrum Regressions," Working papers 96, Massachusetts Institute of Technology (MIT), Department of Economics.
- Pesaran, M H & Deaton, Angus S, 1978. "Testing Non-Nested Nonlinear Regression Models," Econometrica, Econometric Society, vol. 46(3), pages 677-694, May.
- M. A. King, 1971. "Corporate Taxation and Dividend Behaviour—A Comment," Review of Economic Studies, Oxford University Press, vol. 38(3), pages 377-380.
- M. S. Feldstein, 1970. "Corporate Taxation and Dividend Behaviour," Review of Economic Studies, Oxford University Press, vol. 37(1), pages 57-72.
- Oulton, Nicholas, 1978. "Explaining aggregate investment in Britain : The importance of Tobin's Q," Economics Letters, Elsevier, vol. 1(3), pages 253-257.
- Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
- Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
- Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0829. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.