Capital tax reform and the real economy: the effects of the 2003 dividend tax cut

Danny Yagan

No 1322, Working Papers from Oxford University Centre for Business Taxation

Abstract: Policymakers frequently propose to use capital tax reform to stimulate investment and increase labour earnings. This paper tests for such real impacts of the 2003 dividend tax cut? one of the largest reforms ever to a U.S. capital tax rate? using a quasi-experimental design and a large sample of U.S. corporate tax returns from years 1996-2008. I estimate that the tax cut caused zero change in corporate investment, with an upper bound elasticity with respect to one minus the top statutory tax rate of .08 and an upper bound effect size of .03 standard deviations. This null result is robust across speci?cations, samples, and investment measures. I similarly fi?nd no impact on employee compensation. The lack of detectable real effects contrasts with an immediate impact on ?financial payouts to shareholders. Economically, the ?findings challenge leading estimates of the cost-of-capital elasticity of investment, or undermine models in which dividend tax reforms affect the cost of capital. Either way, it may be difficult for policymakers to implement an alternative dividend tax cut that has substantially larger near-term effects.

Date: 2013
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Related works:
Journal Article: Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut (2015)
Working Paper: Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut (2015)
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