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American Economic Journal: Economic Policy: Vol. 2 No. 3 (August 2010)

AEJ: Policy Volume. 2, Issue 3 | Previous ArticleNext Article

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Dividend and Corporate Taxation in an Agency Model of the Firm

Article Citation

Chetty, Raj, and Emmanuel Saez. 2010. "Dividend and Corporate Taxation in an Agency Model of the Firm." American Economic Journal: Economic Policy, 2(3): 1-31.

DOI: 10.1257/pol.2.3.1

Abstract

Recent evidence on the effect of dividend taxes on firm behavior is inconsistent with neoclassical theories of dividend and corporate taxation. We develop a simple agency model in which managers and shareholders have conflicting interests to explain the evidence. In this model, dividend taxation induces managers to undertake unproductive investments by retaining earnings, and creates a first-order deadweight cost. In contrast, corporate taxes do not distort the manager's payout decision and may only create second-order efficiency costs. Corporate income taxation may therefore be a more efficient way to generate revenue than dividend taxation, challenging existing intuitions based on neoclassical models. (JEL D21, G35, H25, H32)

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Authors

Chetty, Raj (Harvard U)
Saez, Emmanuel (U CA, Berkeley)

JEL Classifications

D21: Firm Behavior: Theory
G35: Payout Policy
H25: Business Taxes and Subsidies including sales and value-added (VAT)
H32: Fiscal Policies and Behavior of Economic Agents: Firm

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