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Taxes and Portfolio Choice: Evidence from JGTRRA's Treatment of International Dividends

  • Mihir A. Desai
  • Dhammika Dharmapala

This paper investigates how taxes influence portfolio choices by exploring the response to the distinctive treatment of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). JGTRRA lowered the dividend tax rate to 15% for American equities and extended this tax relief only to foreign corporations from a subset of countries. This paper uses a difference-in-difference analysis that compares US equity holdings in affected and unaffected countries. The international investment responses to JGTRRA were substantial and imply an elasticity of asset holdings with respect to taxes of -1.6. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment or changed tax evasion behavior.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13281.

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Date of creation: Jul 2007
Date of revision:
Handle: RePEc:nbr:nberwo:13281
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