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Dividend and Capital Gains Taxation in a Cross-Section of Firms

  • Martin D. Dietz

    (University of St. Gallen, Institut fur Finanzwirtschaft und Finanzrecht IFF-HSG)

I reconsider the effect of capital income taxation on firm size and firm growth by embedding the nucleus theory of firm development of Sinn (1991) into a framework of monopolistic competition with new firm creation. In a turnover of firms, firm destruction is counterbalanced by a permanent creation of new firms. Young firms are set up using an initial capital infusion of new equity and undergo an intermediate stage of internal growth until they finally reach a steady payout stage. The cross-section then contains firms of all ages and development stages. Dividend and capital gains tax have important effects on initial firm size and growth but also on the creation of new firms and thus on diversity in the economy. First, a differential treatment of dividends and capital gains introduces a distortion in the allocation of capital across firms. Second, dividend as well as capital gains tax are anticipated at the start-up stage of firms. While leaving the firm specific capital stock unaffected, the capitalisation is shown to depress firm creation and aggregate capital accumulation.

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File URL: http://128.118.178.162/eps/pe/papers/0405/0405004.pdf
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Paper provided by EconWPA in its series Public Economics with number 0405004.

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Length: 28 pages
Date of creation: 13 May 2004
Date of revision:
Handle: RePEc:wpa:wuwppe:0405004
Note: Type of Document - pdf; pages: 28
Contact details of provider: Web page: http://128.118.178.162

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  1. Hassett, Kevin A. & Hubbard, R. Glenn, 2002. "Tax policy and business investment," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 20, pages 1293-1343 Elsevier.
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