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Dividend Taxes, Household Heterogeneity, and the US Great Depression

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  • Jiang, Lunan

Abstract

As shown by McGrattan (2012), an anticipated increase in dividend taxes plays an important role in explaining the dramatic investment decline during the U.S. Great Depression. This paper attempts to investigate whether this is still robust to a model with household heterogeneity and precautionary saving motives. I build an Aiyagari model with dynamic firms,dividend taxes, and labor productivity shocks, which are calibrated to account for the U.S. earnings and wealth Inequality during the Great Depression using 1930s data. The conclusion is that the impact of anticipated increases in dividend taxes is very sensitive to the presence of household heterogeneity. The quantitative results show that, in the presence of household heterogeneity, the predicted investment is 50% smaller than in the standard business cycle model proposed by McGrattan (2012). The decline in output and working hours also become much less significant. Intuitively, although the anticipated hike in dividend taxes diminishes the expected return to the investment, it also shrinks the total assets that households use for self-insurance against the highly persistent idiosyncratic shocks. In order to retain the desired asset level, precautious households keep their savings at a lower capital return and the model ultimately generates a lower aggregate investment decline.

Suggested Citation

  • Jiang, Lunan, 2015. "Dividend Taxes, Household Heterogeneity, and the US Great Depression," MPRA Paper 77029, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:77029
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    File URL: https://mpra.ub.uni-muenchen.de/77029/1/MPRA_paper_77029.pdf
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    References listed on IDEAS

    as
    1. François Gourio & Jianjun Miao, 2010. "Firm Heterogeneity and the Long-Run Effects of Dividend Tax Reform," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 131-168, January.
    2. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
    3. Harold L. Cole & Lee E. Ohanian, 1999. "The Great Depression in the United States from a neoclassical perspective," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-24.
    4. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
    5. Joines, Douglas H, 1981. "Estimates of Effective Marginal Tax Rates on Factor Incomes," The Journal of Business, University of Chicago Press, vol. 54(2), pages 191-226, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Dividend Taxes; Household Heterogeneity; Investment; and the U.S. Great Depression;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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