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Dividend Taxes, Household Heterogeneity, and the US Great Depression

Lunan Jiang

MPRA Paper from University Library of Munich, Germany

Abstract: As shown by McGrattan (2012), an anticipated increase in dividend taxes plays an important role in explaining the dramatic investment decline during the U.S. Great Depression. This paper attempts to investigate whether this is still robust to a model with household heterogeneity and precautionary saving motives. I build an Aiyagari model with dynamic firms,dividend taxes, and labor productivity shocks, which are calibrated to account for the U.S. earnings and wealth Inequality during the Great Depression using 1930s data. The conclusion is that the impact of anticipated increases in dividend taxes is very sensitive to the presence of household heterogeneity. The quantitative results show that, in the presence of household heterogeneity, the predicted investment is 50% smaller than in the standard business cycle model proposed by McGrattan (2012). The decline in output and working hours also become much less significant. Intuitively, although the anticipated hike in dividend taxes diminishes the expected return to the investment, it also shrinks the total assets that households use for self-insurance against the highly persistent idiosyncratic shocks. In order to retain the desired asset level, precautious households keep their savings at a lower capital return and the model ultimately generates a lower aggregate investment decline.

Keywords: Dividend Taxes; Household Heterogeneity; Investment; and the U.S. Great Depression (search for similar items in EconPapers)
JEL-codes: E21 E44 E62 (search for similar items in EconPapers)
Date: 2015-02
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