Should We Increase Dividend Taxation? 3 Views

In the NYTimes this morning, Steven Rattner joined a number of others (e.g. Laura Tyson) in calling for higher dividend tax rates. There are three main views on the efficiency costs of dividend taxation:

  1. Old View: The old view (Poterba and Summers) thinks that dividend taxation affects the discount rate firms use and thus dividend tax rates distort investment decisions.
  2. New View: The new view (Auerbach and Hassett) says that’s true for younger firms but for mature firms such as General Electric or Ford, dividend taxes are just lump sum levies and they don’t affect the level of investment.
  3. Agency View: There is also the Chetty-Saez view that emphasizes how dividend tax rates can affect agency issues within the firm. In particular, when dividend taxes are lower, managers can’t get away with as much because powerful shareholders care more about what they do and crack down on pet projects.

Bottom line: the old and the agency view think dividend taxes are pretty bad and distortionary, whereas the new view thinks that for a substantial share of firms (i.e. those that are mature), dividend taxes are lump sum and thus very efficient.

Auerbach’s handbook chapter on corporate financial policy has more detail on these views.

About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar.
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2 Responses to Should We Increase Dividend Taxation? 3 Views

  1. Noah Smith says:

    Typo in the “Bottom Line” paragraph. You wrote “old” when you meant to write “new”.

    Great blogging, keep up the good work!

  2. Pingback: Economist's View: Links for 11-26-2012

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