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The Growth and Welfare Effects of Deficit-Financed Dividend Tax Cuts

Authors


  • I wish to thank John Seater for many useful discussions in the early stages of this project. I also thank Alexandra Tabova for her excellent research assistance and two anonymous referees and the editor of this journal for comments that improved the presentation.

Abstract

I develop a tractable growth model that allows me to study analytically transition dynamics and welfare in response to a deficit-financed cut of the tax rate on distributed dividends. I then carry out a quantitative assessment of the Job Growth and Taxpayer Relief Reconciliation Act (JGTRRA) of 2003. I find that the Act produces lower steady-state growth despite the fact that the economy’s saving and employment ratios rise. Most importantly, it produces a welfare loss of 19.34% of annual consumption per capita—a substantial effect driven by the fact that the steady-state growth rate falls from 2% to 1.08%.

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