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Taxation and Corporate Payout Policy

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  • James Poterba

Abstract

This paper presents new evidence on how corporate payout policy responds to the differential between the tax burden on dividend income and that on accruing capital gains. It describes the construction of weighted average marginal tax rate series for the period since 1929, and it suggests that the enactment of the Job Growth of Taxpayer Relief Reconciliation Act of 2003 should raise the after-tax value of dividends relative to capital gains by more than five percentage points. The impact of this change on payout depends on the elasticity of dividend payments with respect to the after-tax value of dividend income relative to capital gains. Time series estimates suggest an elasticity of more than three, and imply that the recent tax reform could ultimately increase dividends by almost twenty percent.
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Suggested Citation

  • James Poterba, 2004. "Taxation and Corporate Payout Policy," American Economic Review, American Economic Association, vol. 94(2), pages 171-175, May.
    • Handle: RePEc:aea:aecrev:v:94:y:2004:i:2:p:171-175
    Note: DOI: 10.1257/0002828041301416
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/0002828041301416
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    References listed on IDEAS

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    1. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292, Elsevier.
    2. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Carroll, Robert & Hassett, Kevin A. & Mackie, James B. III, 2003. "The Effect of Dividend Tax Relief on Investment Incentives," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(3), pages 629-651, September.
    4. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 455-516.
    5. Auerbach, Alan J. & Hassett, Kevin A., 2003. "On the marginal source of investment funds," Journal of Public Economics, Elsevier, vol. 87(1), pages 205-232, January.
    6. Gravelle, Jane G., 2003. "Effects of Dividend Relief on Economic Growth, the Stock Market, and Corporate Tax Preferences," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(3), pages 653-672, September.
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    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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