The Efficiency Costs of Dividend Taxation with Managerial Firms*

Abstract

The paper provides a positive and efficiency analysis of dividend taxation in a corporate agency model with a costly managerial effort. Unlike existing (agency) models, this model is consistent with empirical work in corporate finance and able to predict empirically observed investment responses to dividend taxation. In addition, we show that investment changes are not sufficient to infer, first, the efficiency cost of dividend taxation and, second, the financing regime underlying firms’ investments. We provide a testable implication that allows to empirically uncover the source of investment finance by comparing investment responses to dividend taxes and managerial incentive pay.

Optimal labor income taxation with the dividend effect

“…For a similar constraint, seeÁbrahám et al (2016). The problem of dividend taxation is cardinally different from labor income taxation; for a recent exposition see, e.g.,Koethenbuerger and Stimmelmayr (2022).…”

“…We leave the analysis of optimal dividend taxation outside the scope of this paper. See Saez (2005, 2010) orKoethenbuerger and Stimmelmayr (2022) for more on dividend taxation.…”