Taxes and Portfolio Choice: Evidence from Jgtrra's Treatment of International Dividends

34 Pages Posted: 23 Jul 2007 Last revised: 5 Oct 2007

See all articles by Dhammika Dharmapala

Dhammika Dharmapala

University of Chicago Law School

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Date Written: July 2007

Abstract

This paper investigates how taxes influence portfolio choices by exploring the response to the distinctive treatment of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). JGTRRA lowered the dividend tax rate to 15% for American equities and extended this tax relief only to foreign corporations from a subset of countries. This paper uses a difference-in-difference analysis that compares US equity holdings in affected and unaffected countries. The international investment responses to JGTRRA were substantial and imply an elasticity of asset holdings with respect to taxes of -1.6. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment or changed tax evasion behavior.

Suggested Citation

Dharmapala, Dhammika and Desai, Mihir A., Taxes and Portfolio Choice: Evidence from Jgtrra's Treatment of International Dividends (July 2007). NBER Working Paper No. w13281. Available at SSRN: https://ssrn.com/abstract=1002060

Dhammika Dharmapala

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

Mihir A. Desai (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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