Follow the money! Why dividends overreact to flat-tax reforms

We estimate behavioral responses to dividend taxation using recent French reforms: a rate hike and, five years later, a cut. Exploiting tax data at household and firm-level, we find very large dividend tax elasticities to both reforms. Individuals who control firms adjust dividend receipts instantaneously, accounting for most of the aggregate dividend reaction. Investment is insensitive to dividend taxation, except in small firms whose reaction is moderately negative. Dividend adjustments are instead driven by corporate saving, as owner-managers treat firms as tax-free saving vehicles. Small businesses’ profits decline following dividend tax increases, suggesting firms also serve as tax-free consumption vehicles.

(Laurent Bach, Antoine Bozio, Brice Fabre, Arthur Guillouzouic, Claire Leroy and Clément Malgouyres)