Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-27T04:57:50.847Z Has data issue: false hasContentIssue false
  • English
  • Français

A NOTE ON THE IMPACT OF PROGRESSIVE DIVIDEND TAXATION ON INVESTMENT DECISIONS

Published online by Cambridge University Press:  15 December 2010

Marika Santoro  and
Chao Wei
Marika Santoro
Affiliation:
Macroeconomic Analysis Division, Congressional Budget Office
Chao Wei*
Affiliation:
George Washington University
*
Address correspondence to: Chao Wei, Department of Economics, George Washington University, 2115 G Street NW, Washington, DC 20052, USA; e-mail: cdwei@gwu.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper studies the distortionary impact of progressive dividend taxation on investment decisions under the premises of the “new” view. According to the new view, proportional dividend taxation does not distort firms' investment decisions. We find that progressive dividend taxation distorts investment decisions due to endogenous variations in the marginal tax rate caused by stochastic taxable income over the business cycle. The magnitude of this distortion critically depends upon the marginal tax rate and the progressivity of the tax system.

Keywords

New ViewDividend TaxInvestmentMarginal Tax Rate
Type
Notes
Information
Macroeconomic Dynamics , Volume 16 , Issue 2 , April 2012 , pp. 309 - 319
Copyright
Copyright © Cambridge University Press 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Auerbach, Alan J. (2002) Taxation and corporate financial policy. In Auerbach, Alan and Feldstein, Martin (eds.), Handbook of Public Economics, Vol. 3, pp. 1252–1289. Amsterdam: North Holland.Google Scholar
Boldrin, Michele, Christiano, Lawrence J., and Fisher, Jonas (2001) Habit persistence, asset returns and the business cycle. American Economic Review 91 (1), 149–166.CrossRefGoogle Scholar
Conesa, Juan Carlos and Krueger, Dirk (2006) On the optimal progressivity of the tax code. Journal of Monetary Economics 53 (7), 1425–1450.CrossRefGoogle Scholar
Erosa, Andres and Koreshkova, Tatyana (2007) Progressive taxation in a dynastic model of human capital. Journal of Monetary Economics 54, 667–685.CrossRefGoogle Scholar
Gourio, Francois and Miao, Jianjun (in press) Transitional dynamics of dividend tax and capital gains tax cuts. Review of Economic Dynamics.Google Scholar
Gourio, Francois and Miao, Jianjun (2010) Firm heterogeneity and the long-run effects of dividend tax reform. American Economic Journal: Macroeconomics 2 (1), 131–168.Google Scholar
Gouveia, M. and Strauss, R. (1994) Effective federal individual tax functions: An exploratory empirical aynalysis. National Tax Journal 47, 317–339.CrossRefGoogle Scholar
Griffoli, Tommaso Mancini (2007) Dynare User Guide: An Introduction to the Solution & Estimation of DSGE Models. Available at http://www.dynare.org/documentation-and-support/user-guide/Dynare-UserGuide-WebBeta.pdf.view.Google Scholar
Hassett, Kevin and Hubbard, Glenn (2002) Tax policy and business investment. In Auerbach, Alan and Feldstein, Martin (eds.), Handbook of Public Economics, Vol. 3, pp. 1294–1338. Amsterdam: North Holland.Google Scholar
Jermann, Urban (1998) Asset pricing in production economies. Journal of Monetary Economics 41, 257–275.CrossRefGoogle Scholar
McGrattan, Ellen and Prescott, Edward (2005) Taxes, regulations, and the value of U.S. and U.K. corporations. Review of Economic Studies 72, 767–796.CrossRefGoogle Scholar
Miller, Merton and Modigliani, Franco (1961) Dividend policy, growth and the valuation of shares. Journal of Business 34 (4), 411–433.CrossRefGoogle Scholar
Poterba, James and Summers, Lawrence (1983) Dividend taxes, corporate investment, and “Q.” Journal of Public Economics 22, 135–167.CrossRefGoogle Scholar
Poterba, James M. and Summers, Lawrence H. (1985) The economic effects of dividend taxation. In Altman, Edward and Subrahmanyam, Marti (eds.), Recent Advances in Corporate Finance, pp. 227–284. Homewood, IL: Richard D. Irwin, Publishers.Google Scholar
Young, H. Peyton (1990) Progressive taxation and equal sacrifice. American Economic Review 80 (1), 253–266.Google Scholar