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© 2022 International Monetary Fund
WP/22/127
IMF Working Paper
Western Hemisphere Department
Macroeconomic Effects of Dividend Taxation with Investment Credit Limits
Prepared by Matteo F. Ghilardi and Roy Zilberman*
Authorized for distribution by Rishi Goyal
July 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: We analyze the effects of dividend taxation in a general equilibrium business cycle model with an occasionally-binding investment credit limit. Permanent dividend tax reforms distort capital investment decisions in the binding long-run equilibrium, but are neutral otherwise. Temporary unexpected tax cuts stimulate short-term real activity in the credit-constrained economy, yet produce contractionary macroeconomic outcomes in the slack regime. The occasionally-binding constraint reconciles the `traditional’ and `new’ views of dividend taxation, and highlights the importance of measuring the firm’s initial borrowing position before enacting tax reforms. Finally, permanently lower dividend taxes dampen financial business cycles, and help to explain macroeconomic asymmetries.
| JEL Classification Numbers: | E22; E44; E62; H24; H25; H32 |
| Keywords: | Dividend Taxation; Occasionally-Binding Borrowing Constraints; Investment; Business Cycles. |
| Author’s E-Mail Address: | mghilardi@imf.org r.zilberman@lancaster.ac.uk |
| JEL Classification Numbers: | E22; E44; E62; H24; H25; H32 |
| Keywords: | Dividend Taxation; Occasionally-Binding Borrowing Constraints; Investment; Business Cycles. |
| Author’s E-Mail Address: | mghilardi@imf.org r.zilberman@lancaster.ac.uk |
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WORKING PAPERS
Macroeconomic Effects of Dividend Taxation with Investment Credit Limits
Prepared by Matteo F. Ghilardi and Roy Zilberman
The authors would like to thank Olivier Cardi, William Tayler, Ana MarÃa Trujillo, John Whittaker, as well as participants at the Lancaster University Macroeconomic Workshop and at the Computing in Economics and Finance (CEF) 2022 conference for discussions, comments, and suggestions.