Capital Taxation during the U.S. Great Depression
FRB of Minneapolis Working Paper No. 670
Posted: 18 Jun 2009
Date Written: April 20, 2009
Previous studies quantifying the effects of increased capital taxation during the U.S. Great Depression find that its contribution is small, both in accounting for the downturn in the early 1930s and in accounting for the slow recovery after 1934. This paper confirms that the effects are small in the case of taxation of business profits, but finds large effects in the case of taxation of dividend income. Tax rates on dividends rose dramatically during the 1930s and, when fed into a general equilibrium model, imply significant declines in investment and equity values and nontrivial declines in gross domestic product (GDP) and hours of work. The results are amplified if businesses make intangible investments which can be expensed from taxable capital income.
Keywords: taxation of dividends, intangible capital, Great Depression
JEL Classification: E62, E65, H24
Suggested Citation: Suggested Citation