Transitional Dynamics of Dividend and Capital Gains Tax Cuts

Francois Gourio and Jianjun Miao

Review of Economic Dynamics, 2011, vol. 14, issue 2, 368-383

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. (Copyright: Elsevier)

Keywords: Capital gains tax; Dividend tax policies; Investment and financial policies; Finance regimes; Collateral constraint; Intertemporal tax arbitrage (search for similar items in EconPapers)
JEL-codes: D92 E22 E62 G31 G32 H32 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (34)

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DOI: 10.1016/j.red.2010.06.002

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