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Capital Taxation, Retained Earnings and Inequality: Evidence from Dividend Tax Reforms

Author

Listed:
  • Berman, Yonatan

    (King's College London)

  • Klor, Esteban F.

    (Hebrew University, Jerusalem)

Abstract

This paper studies the effects of capital tax reforms on retained earnings, dividend tax revenues, and income inequality in Israel between 2001 and 2020. We analyze two major dividend tax reforms: a permanent rate increase in 2012 and a temporary tax relief in 2017. By combining administrative income tax data, household surveys, and national accounts, we find that both permanent and temporary capital tax changes substantially affect retained earnings. The five percentage points increase in the dividend tax rate resulted in an immediate increase of over 100% in the withdrawal of retained earnings and in dividend tax revenues. While the permanent tax increase did not cause a long-term change in retained earnings withdrawals, the temporary tax relief triggered a significant increase in retained earnings after the relief period ended. Using these reforms, we improve the measurement of income inequality by directly observing the distribution of retained earnings. We find stable levels of income inequality in Israel after 2007, with a top 10% income share of around 48%, a high level by international standards.

Suggested Citation

  • Berman, Yonatan & Klor, Esteban F., 2024. "Capital Taxation, Retained Earnings and Inequality: Evidence from Dividend Tax Reforms," IZA Discussion Papers 17373, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp17373
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    References listed on IDEAS

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    1. Raj Chetty & Emmanuel Saez, 2005. "Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 791-833.
    2. Ofer Cornfeld & Oren Danieli, 2015. "The Origins Of Income Inequality In Israel—Trends And Policy," Israel Economic Review, Bank of Israel, vol. 12(2), pages 51-95.
    3. Thomas Piketty & Gabriel Zucman, 2014. "Capital is Back: Wealth-Income Ratios in Rich Countries 1700–2010," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(3), pages 1255-1310.
    4. Thomas Piketty & Emmanuel Saez & Gabriel Zucman, 2018. "Distributional National Accounts: Methods and Estimates for the United States," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(2), pages 553-609.
    5. Danny Yagan, 2015. "Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut," American Economic Review, American Economic Association, vol. 105(12), pages 3531-3563, December.
    6. Thomas Piketty & Emmanuel Saez, 2003. "Income Inequality in the United States, 1913–1998," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 1-41.
    7. Jukka Pirttilä & Håkan Selin, 2011. "Income Shifting within a Dual Income Tax System: Evidence from the Finnish Tax Reform of 1993," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(1), pages 120-144, March.
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    More about this item

    Keywords

    capital tax reform; income inequality; retained earnings;
    All these keywords.

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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