NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

An Agency Theory of Dividend Taxation

Raj Chetty, Emmanuel Saez

NBER Working Paper No. 13538
Issued in October 2007
NBER Program(s):   CF   PE

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.

download in pdf format
   (578 K)

email paper

This paper is available as PDF (578 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13538

Published: 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

Users who downloaded this paper also downloaded these:
Poterba and Summers w1353 The Economic Effects of Dividend Taxation
Korinek and Stiglitz w13858 Dividend Taxation and Intertemporal Tax Arbitrage
Gordon and Dietrich Dietz w12292 Dividends and Taxes
Hausman, Pritchett, and Rodrik w10566 Growth Accelerations
Chetty and Saez w10841 Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us