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Dividend and Capital Gains Taxation under Incomplete Markets

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  • Alexis Anagnostopoulos

    () (Department of Economics, Stony Brook University)

  • Eva Carceles-Poveda

    () (Department of Economics, Stony Brook University)

Abstract

The capital income tax cuts that were part of the Jobs and Growth Tax Relief Reconciliation Act of 2003 are expiring this year and the administration has to decide whether to extend them or not. This paper assesses the effects of these tax cuts in a calibrated dynamic general equilibrium framework with uninsurable labor income risk. In particular, it looks at the effects of dividend and capital gains taxes on investment and welfare in a framework where firms are the owners of capital and make investment decisions to maximize their market value. While the effects of capital gains taxes are qualitatively similar to those found when households own the capital, we find that the effects of dividend taxes are different. Surprisingly, a dividend tax cut leads to a reduction in investment. The reason is that it raises the market valuation of the existing capital stock and households require a lower capital stock to maintain the same level of wealth. As a consequence, dividend tax cuts are welfare reducing in the long run, not only because of the traditional reasons of redistribution from the poor to rich, but also because of a fall in aggregate production and consumption. Taking into account the transition mitigates the losses. Still, with our benchmark calibration, a reduction of dividend and capital gains taxes from 31% and 24% to 19% leads to a reduction of more than 0.5% in aggregate welfare in consumption equivalent terms.

Suggested Citation

  • Alexis Anagnostopoulos & Eva Carceles-Poveda, 2010. "Dividend and Capital Gains Taxation under Incomplete Markets," Department of Economics Working Papers 10-06, Stony Brook University, Department of Economics.
  • Handle: RePEc:nys:sunysb:10-06
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    Citations

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    Cited by:

    1. Anagnostopoulos, Alexis & Li, Qian, 2013. "Consumption taxes and precautionary savings," Economics Letters, Elsevier, vol. 119(3), pages 238-242.
    2. Strulik, Holger & Trimborn, Timo, 2012. "Laffer strikes again: Dynamic scoring of capital taxes," European Economic Review, Elsevier, vol. 56(6), pages 1180-1199.
    3. Orhan Atesagaoglu & Eva Carceles-Poveda & Alexis Anagnostopoulos, 2014. "Capital Income Taxation with Household and Firm Heterogeneity," 2014 Meeting Papers 525, Society for Economic Dynamics.
    4. William Gavin & Benjamin Keen & Finn Kydland, 2015. "Monetary Policy, the Tax Code, and the Real Effects of Energy Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 694-707, July.
    5. Alexis Anagnostopoulos & Eva Carceles-Poveda & Yair Tauman, 2016. "Value Preserving Welfare Weights for Social Optimization Problems," Department of Economics Working Papers 16-06, Stony Brook University, Department of Economics.
    6. Alexis Anagnostopoulos & Orhan Erem Atesagaoglu & Eva Carceles-Poveda, 2014. "On the Double Taxation of Corporate Profits," Department of Economics Working Papers 14-03, Stony Brook University, Department of Economics.
    7. Chen, Daphne & Qi, Shi & Schlagenhauf, Don E., 2014. "Corporate income tax, legal form of organization, and employment," Working Papers 2014-18, Federal Reserve Bank of St. Louis.
    8. Winter, Christoph & Kraus, Beatrice, 2016. "Do Tax Changes Affect Credit Markets and Financial Frictions? Evidence from Credit Spreads," Annual Conference 2016 (Augsburg): Demographic Change 145636, Verein für Socialpolitik / German Economic Association.
    9. repec:eee:ecolet:v:167:y:2018:i:c:p:147-151 is not listed on IDEAS
    10. Conesa, Juan C. & Domínguez, Begoña, 2013. "Intangible investment and Ramsey capital taxation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 983-995.

    More about this item

    Keywords

    Incomplete Markets; Tax Reform; Dividend Taxes; Capital Gains Taxes.;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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