Macroeconomic Effects of Dividend Taxation with Investment Credit Limits

Ghilardi, Matteo and Zilberman, Roy (2023) Macroeconomic Effects of Dividend Taxation with Investment Credit Limits. Working Paper. Lancaster University, Department of Economics, Lancaster.

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Abstract

A dynamic general equilibrium model augmented for an occasionally-binding investment borrowing limit reconciles competing views on the macroeconomic effects of dividend taxation. Permanent tax reforms are distortionary in the credit-constrained long-run equilibrium but are neutral otherwise. Temporary tax cuts may be expansionary or contractionary in the short-term depending on their scale and on the firm's initial and interim credit position. Interactions between payout tax shocks and the financial constraint tightness produce state-contingent, non-linear, and asymmetrical macroeconomic dynamics. These findings are consistent with the varied responses in investment rates and asset prices observed in the data following historical dividend tax changes.