EconPapers    
Economics at your fingertips  
 

An Agency Theory of Dividend Taxation

Raj Chetty and Emmanuel Saez

No 13538, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent empirical studies of dividend taxation have found that: (1) dividend tax cuts cause large, immediate increases in dividend payouts, and (2) the increases are driven by firms with high levels of shareownership among top executives or the board of directors. These findings are inconsistent with existing "old view" and "new view" theories of dividend taxation. We propose a simple alternative theory of dividend taxation in which managers and shareholders have conflicting interests, and show that it can explain the evidence. Using this agency model, we develop an empirically implementable formula for the efficiency cost of dividend taxation. The key determinant of the efficiency cost is the nature of private contracting. If the contract between shareholders and the manager is second-best efficient, deadweight burden follows the standard Harberger formula and is second-order (small) despite the pre-existing distortion of over-investment by the manager. If the contract is second-best inefficient -- as is likely when firms are owned by diffuse shareholders because of incentives to free-ride when monitoring managers -- dividend taxation generates a first-order (large) efficiency cost. An illustrative calibration of the formula using empirical estimates from the 2003 dividend tax reform in the U.S. suggests that the efficiency cost of raising the dividend tax rate could be close to the amount of revenue raised.

JEL-codes: G3 H20 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-bec, nep-pbe and nep-pub
Note: CF PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Published as Chetty, Raj, and Emmanuel Saez. 2010. "Dividend and Corporate Taxation in an Agency Model of the Firm." American Economic Journal: Economic Policy, 2(3): 1-31. DOI: 10.1257/pol.2.3.1

Downloads: (external link)
http://www.nber.org/papers/w13538.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:13538

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w13538

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2024-03-31
Handle: RePEc:nbr:nberwo:13538