Welfare Implications of Dividend Taxation

This working group will take place on Zoom

In the last decades, the dividend tax rate has been on a downward trend in most developed countries, particularly in the US. Despite the debate on capital and corporate taxation has been at the forefront of policy discussions, the literature has not yet reached a consensus concerning optimal policy prescriptions. In this paper, I study the aggregate and welfare effects of a reduction in the dividend tax rate in a model featuring heterogeneous households, incomplete financial markets and endogenous entry of oligopolistically competitive firms. Everything else equal, a decline in the dividend tax rate implies a drop in public revenues and a transfer of resources from wealth poor to wealth rich households. Wealth poor households suffer a welfare loss through two channels: they receive a lower public transfer and they need to give up consumption to increase precautionary savings. When the wealth distribution is highly concentrated as in the data, aggregate welfare falls regardless of the redistributive scheme adopted by the government.