Transitional Dynamics of Dividend and Capital Gains Tax Cuts
We develop a dynamic general equilibrium model to study the impact of the 2003 dividend and capital gains tax cuts. In the model, firms are heterogeneous in productivity and make investment and financing decisions subject to capital adjustment costs, equity issuance costs, and collateral constraints. We show that when the dividend and capital gains tax cuts are unexpected and permanent, dividend payments, equity issuance, and aggregate investment rise immediately. By contrast, when these tax cuts are unexpected and temporary, aggregate investment falls in the short run. This fall allows firms to distribute large dividends initially in response to the temporary dividend tax cut. We also find that the effects of a temporary dividend tax cut are very different from those of a temporary capital gains tax cut.
We thank Alan Auerbach, Christophe Chamley, Simon Gilchrist, Bob King, Anton Korinek, Larry Kotlikoff, and Jim Poterba (AEA discussant), and seminar participants at the Boston University macro lunch, Hong Kong University of Science and Technology, and the 2008 American Economic Association Meeting at New Orleans for helpful comments. This paper is an overhaul of our earlier paper "Dynamic Effects of Permanent and Temporary Dividend Tax Policies on Corporate Investment and Financial Policies." Part of this research was conducted when Miao was visiting Hong Kong University of Science and Technology. The hospitality of this institution is gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Francois Gourio & Jianjun Miao. "Transitional Dynamics of Dividend and Capital Gains Tax Cuts." Review of Economic Dynamics 14, 2 (2011): 368-383. citation courtesy of