Capital Gains Taxation and Corporate Investment

25 Pages Posted: 25 Jan 2016 Last revised: 15 Nov 2016

See all articles by David A. Weisbach

David A. Weisbach

University of Chicago - Law School; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)

Date Written: November 14, 2016

Abstract

This study examines the effect of the interaction of dividend taxes and capital gains taxes on the sale of stock. Using a model of the new view of dividend taxation modified to incorporate realization-based capital gains and losses on stock, it shows that capital gains taxes increase the required rate of return on corporate investments in a way that parallels the required higher return for selling an asset due to lock-in. As a result, capital gains taxes create an incentive to accelerate dividends. Moreover, the capital gains tax rate is endogenous to dividend policy (in addition to turnover rates). Finally, modifying the model to allow sales between tax clienteles shows that the new view does not hold even when projects are financed with retained earnings if such sales occur.

Keywords: dividend taxation, capital gains, new view, lock-in

JEL Classification: H2, H21, H25

Suggested Citation

Weisbach, David, Capital Gains Taxation and Corporate Investment (November 14, 2016). University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 740. Available at SSRN: https://ssrn.com/abstract=2721798 or http://dx.doi.org/10.2139/ssrn.2721798

David Weisbach (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-3342 (Phone)
773-702-0730 (Fax)

Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

5735 S. Ellis Street
Chicago, IL 60637
United States

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