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
Date Written: July 27, 2016
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
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