TY - JOUR AU - Korinek,Anton AU - Stiglitz,Joseph E. TI - Dividend Taxation and Intertemporal Tax Arbitrage JF - National Bureau of Economic Research Working Paper Series VL - No. 13858 PY - 2008 Y2 - March 2008 UR - http://www.nber.org/papers/w13858 L1 - http://www.nber.org/papers/w13858.pdf N1 - Author contact info: Anton Korinek University of Maryland Tydings Hall 4118F College Park, MD 20742 Tel: (917) 543-5237 E-Mail: akorinek@umd.edu Joseph E. Stiglitz Uris Hall, Columbia University 3022 Broadway, Room 814 New York, NY 10027 Tel: 212/854-0671 Fax: 212/662-8474 E-Mail: jes322@columbia.edu AB - We analyze the effects of changes in dividend tax policy using a life-cycle model of the firm, in which new firms first access equity markets, then grow internally, and finally pay dividends when they have reached steady state. In accordance with the traditional view of dividend taxation, new firms raise less equity and invest less the higher the level of dividend taxes. However, as postulated by the new view of dividend taxation, the dividend tax rate is irrelevant for the investment decisions of internally growing and mature firms. Since aggregate investment is dominated by these latter two categories, the level of dividend taxation as well as unanticipated changes in tax rates have only small effects on aggregate investment. Anticipated dividend tax changes, on the other hand, allow firms to engage in inter-temporal tax arbitrage so as to reduce investors' tax burden. This can significantly distort aggregate investment. Anticipated tax cuts (increases) delay (accelerate) firms' dividend payments, which leads them to hold higher (lower) cash balances and, for capital constrained firms, can significantly increase (decrease) aggregate investment for periods after the tax change. The analysis of dividend taxation in a contestable democracy thus has to take into account future policy changes as well as expectations thereof. This can significantly alter the evaluation of any given dividend tax policy. ER -