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Transitional Dynamics of Dividend and Capital Gains Tax Cuts

  • François Gourio
  • Jianjun Miao

We develop a dynamic general equilibrium model to study the impact of the 2003 dividend and capital gains tax cuts. In the model, firms are heterogeneous in productivity and make investment and financing decisions subject to capital adjustment costs, equity issuance costs, and collateral constraints. We show that when the dividend and capital gains tax cuts are unexpected and permanent, dividend payments, equity issuance, and aggregate investment rise immediately. By contrast, when these tax cuts are unexpected and temporary, aggregate investment falls in the short run. This fall allows firms to distribute large dividends initially in response to the temporary dividend tax cut. We also find that the effects of a temporary dividend tax cut are very different from those of a temporary capital gains tax cut.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16157.

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Date of creation: Jul 2010
Date of revision:
Publication status: published as Francois Gourio & Jianjun Miao. "Transitional Dynamics of Dividend and Capital Gains Tax Cuts." Review of Economic Dynamics 14, 2 (2011): 368-383.
Handle: RePEc:nbr:nberwo:16157
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