One of the world's leading Economists, Joseph Stiglitz, visits ESOP August 26. Professor Stiglitz is a Former Chief Economist and Senior Vice President of the World Bank. He was awarded the Nobel Prize in Economics in 2001.
Title: Dividend Taxation and Intertemporal Tax Arbitrage (by Anton Korinek and Joseph E. Stiglitz)
Abstract:
We analyze the effects of changes in dividend tax policy using a life-cycle model of the firm, in which new firms first access equity markets, then grow internally, and finally pay dividends when they have reached steady state. We find that unanticipated permanent changes in tax rates have only small effects on aggregate investment, since macroeconomic dynamics are dominated by mature firms for which dividend taxation is not distortionary. Anticipated or temporary dividend tax changes, on the other hand, create incentives for firms to engage in inter-temporal tax arbitrage so as to reduce investors' tax burden. For example, a temporary tax cut - the type most likely to be enacted by policymakers - induces firms to accelerate dividend payments while tax rates are low, which reduces their cash holdings and makes them capital constrained when large investment opportunities arise. This can significantly lower aggregate investment for periods after the tax cut.
Full text. Slides. Companion paper: Political Economy in a Contestable Democracy: The Case of Dividend Taxation (Anton Korinek and Joseph E. Stiglitz)
Stiglitz also holds a public lecture at the Ministry of Finance Aug 25, 2008.