DP17228 Dividend Taxes and the Allocation of Capital

Author(s): Charles Boissel, Adrien Matray
Publication Date: April 2022
Keyword(s): capital misallocation, corporate taxes
JEL(s): G11, G32, H25, O16
Programme Areas: Public Economics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17228

This paper investigates the 2013 three-fold increase in the French dividend tax rate. Using administrative data covering the universe of firms over 2008-2017 and a quasi-experimental setting, we find that firms swiftly cut dividend payments and used this tax-induced increase in liquidity to invest more. Heterogeneity analyses show that firms with high demand and returns on capital responded most while no group of firms cut their investment. Our results reject models in which higher dividend taxes increase the cost of capital and show that the tax-induced increase in liquidity relaxes credit constraints which can reduce capital misallocation.