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The Effect of Dividend Tax Relief on Investment Incentives

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  • Carroll, Robert
  • Hassett, Kevin A.
  • Mackie, James B. III

Abstract

Reducing the double tax on corporate income has an ambiguous effect on marginal effective tax rates. It depends on the specifics of the policy, the extent of debt finance, whether one adopts the new or the old view of dividend taxes, the identity of the marginal investor, the importance of international capital flows, and the replacement tax regime. We illustrate or discuss each of these sources of ambiguity. We also model the excludable dividend amount (EDA), a feature of the President’s dividend tax proposal, and we calculate the marginal effective tax rate for the 5/15 dividend and capital gains tax relief proposal that has become law.

Suggested Citation

  • 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.
    • Handle: RePEc:ntj:journl:v:56:y:2003:i:3:p:629-51
    DOI: 10.17310/ntj.2003.3.12
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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. 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.
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    Cited by:

    1. Christian Keuschnigg & Martin Dietz, 2007. "A growth oriented dual income tax," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(2), pages 191-221, April.
    2. Yuhn, Ky-hyang & Bennett, Christopher S., 2016. "A Note On The Bush Tax Cuts: Did They Succeed In Stimulating Business Investment?," Macroeconomic Dynamics, Cambridge University Press, vol. 20(6), pages 1623-1639, September.
    3. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    4. James Poterba, 2004. "Taxation and Corporate Payout Policy," American Economic Review, American Economic Association, vol. 94(2), pages 171-175, May.
    5. Richard W. Kopcke, 2005. "The taxation of equity, dividends, and stock prices," Public Policy Discussion Paper 05-1, Federal Reserve Bank of Boston.
    6. Alan J. Auerbach & Kevin A. Hassett, 2005. "The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study," NBER Working Papers 11449, National Bureau of Economic Research, Inc.

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