Transitional Dynamics of Dividend and Capital Gains Tax Cuts

Francois Gourio and Jianjun Miao

No 16157, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D92 E22 E62 G31 H32 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-acc, nep-dge and nep-pub
Note: CF EFG PE
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Citations: View citations in EconPapers (5)

Published as Francois Gourio & Jianjun Miao. "Transitional Dynamics of Dividend and Capital Gains Tax Cuts." Review of Economic Dynamics 14, 2 (2011): 368-383.

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Journal Article: Transitional Dynamics of Dividend and Capital Gains Tax Cuts (2011)
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