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Dividend and Corporate Taxation in an Agency Model of the Firm

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  • Saez, Emmanuel
  • Chetty, Raj

Abstract

Recent evidence on the effect of dividend taxes on firm behavior is inconsistent with neoclassical theories of dividend and corporate taxation. We develop a simple agency model in which managers and shareholders have conflicting interests to explain the evidence. In this model, dividend taxation induces managers to undertake unproductive investments by retaining earnings, and creates a first-order deadweight cost. In contrast, corporate taxes do not distort the manager's payout decision and may only create second-order efficiency costs. Corporate income taxation may therefore be a more efficient way to generate revenue than dividend taxation, challenging existing intuitions based on neoclassical models

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  • Saez, Emmanuel & Chetty, Raj, 2010. "Dividend and Corporate Taxation in an Agency Model of the Firm," Scholarly Articles 9748526, Harvard University Department of Economics.
    • Handle: RePEc:hrv:faseco:9748526
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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