Dividend Taxation and Intertemporal Tax Arbitrage

38 Pages Posted: 19 Mar 2008 Last revised: 2 Apr 2008

See all articles by Anton Korinek

Anton Korinek

University of Virginia - Department of Economics and Darden School of Business; National Bureau of Economic Research (NBER)

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: March 2008

Abstract

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.

Suggested Citation

Korinek, Anton and Stiglitz, Joseph E., Dividend Taxation and Intertemporal Tax Arbitrage (March 2008). NBER Working Paper No. w13858. Available at SSRN: https://ssrn.com/abstract=1106584

Anton Korinek

University of Virginia - Department of Economics and Darden School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Joseph E. Stiglitz (Contact Author)

Columbia Business School - Finance and Economics ( email )

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HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

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