Macroeconomic Effects of Dividend Taxation with Investment Credit Limits

Ghilardi, Matteo F. and Zilberman, Roy (2024) Macroeconomic Effects of Dividend Taxation with Investment Credit Limits. Journal of Political Economy Macroeconomics, 2 (3). pp. 409-448. ISSN 2832-9341

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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, their duration, and the firm's credit position. Interactions between dividend tax shocks and the financial constraint tightness generate state-contingent, nonlinear, 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.