Dividend Taxation and Intertemporal Tax Arbitrage / Anton Korinek, Joseph E. Stiglitz.

Format:

Book

Author/Creator:

Korinek, Anton.

Contributor:

National Bureau of Economic Research.

Stiglitz, Joseph E.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13858.

NBER working paper series no. w13858

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2008.

Summary:

We analyze the effects of changes in dividend tax policy using a life-cycle model of the firm, in which new firms first access equity markets, then grow internally, and finally pay dividends when they have reached steady state.

In accordance with the traditional view of dividend taxation, new firms raise less equity and invest less the higher the level of dividend taxes. However, as postulated by the new view of dividend taxation, the dividend tax rate is irrelevant for the investment decisions of internally growing and mature firms. Since aggregate investment is dominated by these latter two categories, the level of dividend taxation as well as unanticipated changes in tax rates have only small effects on aggregate investment.

Anticipated dividend tax changes, on the other hand, allow firms to engage in inter-temporal tax arbitrage so as to reduce investors' tax burden. This can significantly distort aggregate investment. Anticipated tax cuts (increases) delay (accelerate) firms' dividend payments, which leads them to hold higher (lower) cash balances and, for capital constrained firms, can significantly increase (decrease) aggregate investment for periods after the tax change.

The analysis of dividend taxation in a contestable democracy thus has to take into account future policy changes as well as expectations thereof. This can significantly alter the evaluation of any given dividend tax policy.

Notes:

Print version record

March 2008.