Fiscal Financing and Investment Irreversibility

Matteo F. Ghilardi and Roy Zilberman

No 422913074, Working Papers from Lancaster University Management School, Economics Department

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 (search for similar items in EconPapers)
JEL-codes: E22 E32 E62 H25 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:lan:wpaper:422913074

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