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Payout Taxes and the Allocation of Investment

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  • Bo Becker
  • Marcus Jacob
  • Martin Jacob

Abstract

When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). High taxes will favor firms who can finance internally. If there are no perfect substitutes for equity finance, payout taxes may thus change the investment behavior of firms. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is "locked in" in profitable firms when payout is heavily taxed. Thus, apart from any aggregate effects, payout taxes change the allocation of capital.

Suggested Citation

  • Bo Becker & Marcus Jacob & Martin Jacob, 2011. "Payout Taxes and the Allocation of Investment," NBER Working Papers 17481, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17481
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    Cited by:

    1. Seppo Kari & Jussi Laitila, 2015. "Nonlinear Dividend Tax and the Dynamics of the Firm," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 71(2), pages 153-177, June.
    2. Alstadsæter, Annette & Jacob, Martin & Michaely, Roni, 2017. "Do dividend taxes affect corporate investment?," Journal of Public Economics, Elsevier, vol. 151(C), pages 74-83.
    3. Sebastian Eichfelder & Kerstin Schneider, 2014. "Tax Incentives and Business Investment: Evidence from German Bonus Depreciation," CESifo Working Paper Series 4805, CESifo Group Munich.
    4. Jacob, Martin & Södersten, Jan, 2012. "Mitigating shareholder taxation in small open economies?," Working Paper Series, Center for Fiscal Studies 2012:3, Uppsala University, Department of Economics.
    5. repec:eee:finlet:v:23:y:2017:i:c:p:50-57 is not listed on IDEAS
    6. Brandstetter, Laura & Jacob, Martin, 2013. "Do corporate tax cuts increase investments?," arqus Discussion Papers in Quantitative Tax Research 153, arqus - Arbeitskreis Quantitative Steuerlehre.
    7. repec:eee:pubeco:v:151:y:2017:i:c:p:56-73 is not listed on IDEAS
    8. Nadja Dwenger & Frank M Fossen & Martin Simmler, 2015. "From financial to real economic crisis: evidence from individual firm¨Cbank relationships in Germany," Working Papers 1516, Oxford University Centre for Business Taxation.
    9. repec:bla:scandj:v:118:y:2016:i:4:p:693-717 is not listed on IDEAS
    10. repec:spr:rvmgts:v:11:y:2017:i:3:d:10.1007_s11846-016-0197-9 is not listed on IDEAS
    11. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2013. "Gegen eine rückwärtsgewandte Wirtschaftspolitik. Jahresgutachten 2013/14," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201314, April.
    12. repec:eee:finana:v:51:y:2017:i:c:p:54-68 is not listed on IDEAS
    13. Ji, Philip Inyeob, 2016. "Is corporate payout taxation a long run phenomenon? Evidence from international data," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 84-100.
    14. repec:eee:jfinec:v:124:y:2017:i:3:p:580-598 is not listed on IDEAS
    15. Annette Alstadsaeter & Wojciech Kopczuk & Kjetil Telle, 2014. "Are Closely Held Firms Tax Shelters?," Tax Policy and the Economy, University of Chicago Press, vol. 28(1), pages 1-32.
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    17. Henrekson, Magnus & Sanandaji, Tino, 2016. "Owner-Level Taxes and Business Activity," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 12(1), pages 1-94, March.
    18. Marko Köthenbürger & Michael Stimmelmayr, 2015. "The Efficiency Costs of Dividend Taxation with Managerial Firms," CESifo Working Paper Series 5569, CESifo Group Munich.
    19. repec:eee:jfinec:v:125:y:2017:i:1:p:120-142 is not listed on IDEAS
    20. Dwarkasing, Mintra, 2017. "Essays on inequality and finance," Other publications TiSEM a994c9b7-140f-4f56-bc07-f, Tilburg University, School of Economics and Management.
    21. Dwenger, Nadja & Fossen, Frank M. & Simmler, Martin, 2015. "From financial to real economic crisis: Evidence from individual firm-bank relationships in Germany," Discussion Papers 2015/28, Free University Berlin, School of Business & Economics.
    22. repec:eee:corfin:v:48:y:2018:i:c:p:857-877 is not listed on IDEAS
    23. Ivo Welch, 2016. "Levered Returns," NBER Working Papers 22150, National Bureau of Economic Research, Inc.
    24. repec:eee:advacc:v:34:y:2016:i:c:p:55-63 is not listed on IDEAS

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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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