Dividend and capital gains taxation under incomplete markets

Alexis Anagnostopoulos, Eva Carceles-Poveda and Danmo Lin

Journal of Monetary Economics, 2012, vol. 59, issue 7, 599-611

Abstract: Motivated by the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003, the effects of capital income tax cuts are investigated in an economy with heterogeneous households and a representative, mature firm. Dividend tax cuts, contrary to capital gains tax cuts, lead to a decrease in investment and capital. This is because they increase the market value of existing capital and households require a higher return to hold this additional wealth. In line with empirical evidence, the model predicts substantial increases in dividends and stock prices. Overall, the tax cuts lead to a welfare reduction equivalent to a consumption drop of 0.5%.

Date: 2012
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Working Paper: Dividend and Capital Gains Taxation under Incomplete Markets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:59:y:2012:i:7:p:599-611

DOI: 10.1016/j.jmoneco.2012.06.007

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