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Capital Gains Taxation and New Firm Investment

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  • McGee, M. Kevin

Abstract

This paper simulates the impact of a capital gains tax cut on new and established firms, assuming that new firms differ from their older counterparts because of the dividend trap. For all parameter values, the tax cut increases the mature firms’ desired capital stock, holding interest rates constant. In nearly every case, however, the tax cut is more beneficial to mature firms than to new startups. Indeed, in many of the cases portrayed, the tax cut actually reduces new firm investment. Hence, this paper contradicts the widely held view that a capital gains tax cut would be a well-targeted approach for encouraging new firm capital formation.

Suggested Citation

  • McGee, M. Kevin, 1998. "Capital Gains Taxation and New Firm Investment," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(4), pages 653-673, December.
    • Handle: RePEc:ntj:journl:v:51:y:1998:i:4:p:653-73
    DOI: 10.1086/NTJ41789361
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    References listed on IDEAS

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    Cited by:

    1. Cho, Myeonghwan, 2014. "The effect of capital gains taxation on small business transfers and start-ups," Economic Modelling, Elsevier, vol. 36(C), pages 447-454.
    2. Viard, Alan D., 2000. "Dynamic asset pricing effects and incidence of realization-based capital gains taxes," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 465-488, October.
    3. Christian Keuschnigg & Søren Bo Nielsen, 2004. "Taxation and Venture Capital Backed Entrepreneurship," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(4), pages 369-390, August.
    4. McGee, M. Kevin, 2010. "Twice constrained investment under uncertainty: A mixed time model," Research in Economics, Elsevier, vol. 64(2), pages 110-120, June.
    5. Schulte, Reinhard, 2015. "On real investment by new ventures," Lüneburger Beiträge zur Gründungsforschung 12, Leuphana University of Lüneburg, Department of Entrepreneurship & Start-up Management.
    6. Martin D. Dietz, 2004. "Dividend and Capital Gains Taxation in a Cross-Section of Firms," Public Economics 0405004, University Library of Munich, Germany.

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