Ghilardi, Matteo F. and Zilberman, Roy (2024) Macroeconomic Effects of Dividend Taxation with Investment Credit Limits. Journal of Political Economy Macroeconomics. ISSN 2832-9341 (In Press)
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Abstract
A dynamic general equilibrium model with an occasionally-binding investment borrowing limit reconciles competing views on the macroeconomic effects of dividend taxation. Specifically, permanent tax reforms are distortionary in the credit-constrained long-run equilibrium but are neutral otherwise. In the short- to medium-term, tax cuts produce muted, expansionary, or contractionary impacts depending on their scale, duration, and the firm's credit position. Interactions between dividend tax shocks and the financial constraint tightness generate state-contingent, non-linear, and asymmetrical macroeconomic dynamics. These findings help explain investment rate and asset price fluctuations observed following historical tax reforms. Finally, we explore the implications of dividend tax uncertainty.