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Firm Heterogeneity and the Long-Run Effects of Dividend Tax Reform

  • Jianjun Miao

    (Boston University)

  • Francois Gourio

    (Boston University)

What is the long-run effect of dividend taxation on aggregate capital accumulation? To address this question, we build a dynamic general equilibrium model in which there is a continuum of firms subject to idiosyncratic productivity shocks. We show that at any point in time, a firm may lie in one of three finance regimes: dividend distribution regime, liquidity constrained regime, and equity issuance regime. These finance regimes may change over time in response to idiosyncratic productivity shocks. Firms in different finance regimes respond to dividend taxation in different ways. We calibrate our model to the US data from COMPUSTAT and use this calibrated model to provide an initial quantitative evaluation of the Bush government dividend tax reform in 2003. Our baseline model simulations show that when both dividend and capital gains tax rates are cut from 25 and 20 percent, respectively, to the same 15 percent level permanently, the aggregate long-run capital stock increases by about 3 percent. This result is robust to small changes of parameter values and to several extensions of our baseline model.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 147.

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Date of creation: 2007
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Handle: RePEc:red:sed007:147
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