Fiscal Financing and Investment Irreversibility: The Role of Dividend Taxation

Matteo Ghilardi and Roy Zilberman

No 2025/083, IMF Working Papers from International Monetary Fund

Abstract: We examine the macroeconomic, asset pricing, and public debt consequences of deficit financing dividend taxation in a dynamic general equilibrium model featuring partial investment irreversibility. Dividend taxes interact directly with the occasionally-binding irreversibility constraint, generating tax-augmented user-cost and hangover channels that both shape investment and debt-to-output fluctuations and account for a sizeable share of their long-run volatilities. Our analysis further reveals that debt-offsetting dividend tax hikes initially trigger investment inactivity through higher user-costs, followed by a surge driven by intertemporal tax arbitrage and hangover effects. Finally, debt-driven dividend tax rules amplify asset price fluctuations while delivering only modest fiscal revenue changes.

Keywords: Dividend Taxation; Investment Frictions; Asset Prices; Deficit Financing; Public Debt.; asset price fluctuation; deficit financing dividend taxation; investment irreversibility; arbitrage channel; irreversibility constraint; tax hike; investment friction; tax rule; tax adjustment; Dividend tax; Tax law; Corporate income tax (search for similar items in EconPapers)
Pages: 44
Date: 2025-05-02
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-pbe and nep-pub
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