Dividend Imputation, Investment and Capital Accumulation in Open Economies

Chung Tran and Sebastian Wende

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: A dividend imputation system is designed to address double taxation of capital income by allowing companies to pass on profit taxes paid at the corporate level to shareholders in form of franking tax credits. In this paper, we study implications of dividend imputation in a small open economy model with firm heterogeneity and an internationally integrated capital market. Our analysis indicates that dividend imputation has opposing effects on investment and capital accumulation. On one hand, it mitigates the adverse effects of double taxation and induces more saving and investment; on other hand, it raises the cost of investment for firms that are not fully imputed, which subsequently results in less investment. Moreover, different tax treatments for resident and foreign investors amplify frictions in reallocation of capital across firms, which prevents inflows of foreign capital from fully offsetting the shortage of domestic savings. International investors are not marginal investors in our small open economy setting. Overall, the net effect on capital accumulation is analytically ambiguous, depending on which force is dominant. Our quantitative results indicate that the positive force is dominant and removing dividend imputation leads to decreases in domestic savings, aggregate capital and output. Interestingly, the overall welfare effect is positive as low income households benefit more from additional government transfers, while tax burdens are shifted towards high income households and foreign investors.

Keywords: Double taxation; Franking tax credit; Fiscal policy; Firm heterogeneity; Overlapping generations; Open economy; Dynamic general equilibrium; Welfare. (search for similar items in EconPapers)
JEL-codes: D21 E62 H21 H22 H25 (search for similar items in EconPapers)
Date: 2022-03
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-fdg, nep-int, nep-mac and nep-pbe
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2022-687

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