Capital Gains Taxation and New Firm Investment

M Kevin McGee

National Tax Journal, 1998, vol. 51, issue 4, 653-73

Abstract: This paper simulates the impact of a capital gains tax cut on new and established firms, assuming that new firms differ from their older counterparts because of the dividend trap. For all parameter values, the tax cut increases the mature firms’ desired capital stock, holding interest rates constant. In nearly every case, however, the tax cut is more beneficial to mature firms than to new startups. Indeed, in many of the cases portrayed, the tax cut actually reduces new firm investment. Hence, this paper contradicts the widely held view that a capital gains tax cut would be a well-targeted approach for encouraging new firm capital formation.

Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:ntj:journl:v:51:y:1998:i:4:p:653-73

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