Taxing Capital, Stunting Growth? Capital Income Taxes, Costly Equity Finance, and Investment in R&D

41 Pages Posted: 8 Oct 2014 Last revised: 28 Jul 2016

See all articles by James R. Brown

James R. Brown

Iowa State University - Department of Finance

Gustav Martinsson

Royal Institute of Technology (KTH) - Department of Industrial Economics and Management (INDEK); Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students; Institute for Financial Research (SIFR)

Date Written: July 27, 2016

Abstract

R&D drives long-run growth and is financed extensively with external equity, making it a potentially important mechanism linking capital income taxation with economic performance. Exploiting variation in corporate payout taxes in a broad international panel and in the years surrounding the 2003 US dividend tax cut, we document a robust negative association between payout tax rates and investment in R&D. Higher taxes on capital income (dividends and capital gains) have a stronger negative effect on R&D in more equity-dependent sectors and firms, but little impact on fixed capital spending, consistent with the equity financing mechanism we emphasize. The economic consequences of payout taxation are much larger than prior research suggests.

Keywords: Dividend taxes, Capital gains, Corporate payouts, R&D, Innovation, Economic growth

JEL Classification: G30, H25, O16, O30

Suggested Citation

Brown, James R. and Martinsson, Gustav, Taxing Capital, Stunting Growth? Capital Income Taxes, Costly Equity Finance, and Investment in R&D (July 27, 2016). Swedish House of Finance Research Paper No. 15-14. Available at SSRN: https://ssrn.com/abstract=2506669 or http://dx.doi.org/10.2139/ssrn.2506669

James R. Brown (Contact Author)

Iowa State University - Department of Finance ( email )

Ivy College of Business
Ames, IA 50011
United States
5152944668 (Phone)

Gustav Martinsson

Royal Institute of Technology (KTH) - Department of Industrial Economics and Management (INDEK) ( email )

Stockholm, 100 44
Sweden

HOME PAGE: http://https://www.kth.se/profile/gusma

Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students ( email )

111 60 Stockholm
Sweden

Institute for Financial Research (SIFR) ( email )

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

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