Working Paper: NBER ID: w17481
Authors: Bo Becker; Marcus Jacob; Martin Jacob
Abstract: When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). High taxes will favor firms who can finance internally. If there are no perfect substitutes for equity finance, payout taxes may thus change the investment behavior of firms. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is "locked in" in profitable firms when payout is heavily taxed. Thus, apart from any aggregate effects, payout taxes change the allocation of capital.
Keywords: Payout Taxes; Investment Allocation; Corporate Finance; Tax Policy
JEL Codes: G30; G31; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher payout taxes (G35) | create a wedge between the cost of internal and external equity (G19) |
| higher payout taxes (G35) | lock in investments in profitable firms that can finance internally (D25) |
| payout taxes (G35) | influence investment allocation (G11) |
| payout tax increases (H29) | significant increase in investment rates for firms with high cash flow (G31) |
| payout tax increases (H29) | negative divergence in investment rates for firms with low cash flow (G31) |
| payout tax cuts (G35) | decrease in the difference in investment rates between firms with high and low cash flow (D25) |
| payout taxes (G35) | favor firms with internal resources (L21) |
| governance (G38) | influence response to tax changes (H32) |
| well-governed firms (G38) | respond more significantly to tax changes than poorly governed firms (H32) |