Fiscal Financing and Investment Irreversibility : The Role of Dividend Taxation

Ghilardi, Matteo F. and Zilberman, Roy (2025) Fiscal Financing and Investment Irreversibility : The Role of Dividend Taxation. Working Paper. International Monetary Fund (IMF).

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Abstract

We examine the macroeconomic, asset pricing, and public debt consequences of deficit-financing dividend taxation in a dynamic general equilibrium model featuring partial investment irreversibility. Dividend taxes interact directly with the occasionally-binding irreversibility constraint, generating tax-augmented user-cost and hangover channels that both shape investment and debt-to-output fluctuations and account for a sizeable share of their long-run volatilities. Our analysis further reveals that debt-offsetting dividend tax hikes initially trigger investment inactivity through higher user-costs, followed by a surge driven by intertemporal tax arbitrage and hangover effects. Finally, debt-driven dividend tax rules amplify asset price fluctuations while delivering only modest fiscal revenue changes.