Working Paper: NBER ID: w16157
Authors: Francois Gourio; Jianjun Miao
Abstract: We develop a dynamic general equilibrium model to study the impact of the 2003 dividend and capital gains tax cuts. In the model, firms are heterogeneous in productivity and make investment and financing decisions subject to capital adjustment costs, equity issuance costs, and collateral constraints. We show that when the dividend and capital gains tax cuts are unexpected and permanent, dividend payments, equity issuance, and aggregate investment rise immediately. By contrast, when these tax cuts are unexpected and temporary, aggregate investment falls in the short run. This fall allows firms to distribute large dividends initially in response to the temporary dividend tax cut. We also find that the effects of a temporary dividend tax cut are very different from those of a temporary capital gains tax cut.
Keywords: dividend tax cuts; capital gains tax cuts; dynamic general equilibrium; firm heterogeneity; investment
JEL Codes: D92; E22; E62; G31; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpected and permanent dividend and capital gains tax cuts (H24) | aggregate investment (E22) |
| unexpected and permanent dividend and capital gains tax cuts (H24) | consumption (E21) |
| unexpected and permanent dividend and capital gains tax cuts (H24) | output (C67) |
| unexpected and permanent dividend and capital gains tax cuts (H24) | labor (J89) |
| unexpected and permanent dividend and capital gains tax cuts (H24) | total factor productivity (TFP) (D24) |
| unexpected and temporary dividend and capital gains tax cuts (H29) | aggregate investment (E22) |
| unexpected and temporary dividend and capital gains tax cuts (H29) | dividend payments (G35) |
| aggregate investment (E22) | capital accumulation (E22) |
| aggregate investment (E22) | new steady state consumption (E21) |