Working Paper: NBER ID: w15044
Authors: Francois Gourio; Jianjun Miao
Abstract: To study the long-run effect of dividend taxation on aggregate capital accumulation, we build a dynamic general equilibrium model in which there is a continuum of firms subject to idiosyncratic productivity shocks. We find that a dividend tax cut raises aggregate productivity by reducing the frictions in the reallocation of capital across firms. 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 4 percent.
Keywords: dividend tax reform; capital accumulation; firm heterogeneity; general equilibrium model
JEL Codes: E22; E62; G31; G35; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dividend tax cut (H25) | Increase in aggregate capital stock (E22) |
| Reduction of frictions in capital reallocation (F16) | Increase in overall productivity (O49) |
| Dividend tax cut (H25) | Transition of liquidity-constrained firms into equity issuance regime (G33) |
| Transition of liquidity-constrained firms into equity issuance regime (G33) | Issue new equity and invest more in capital (G31) |
| Increase in aggregate capital stock (E22) | Increase in aggregate demand for labor (J23) |
| Increase in aggregate demand for labor (J23) | Increase in wages (J31) |
| Increase in wages (J31) | Decrease in profits (D33) |
| Dividend tax cut (from 25% and 20% to 15%) (H29) | Increase in aggregate capital stock (E22) |
| Reduction of dividend tax rate (from 25% to 20%) (H29) | Smaller increase in aggregate capital stock (E22) |