The statistical analysis of firm-level data on U.S. multinational companies was conducted at the International Investment Division, Bureau of Economic Analysis, U.S. Department of Commerce under arrangements that maintain legal confidentiality requirements. The views expressed are those of the authors

We thank Nick Bloom and Steve Bond for providing the data used in the paper and seminar participants at the Bank of England, Bank of Spain and Royal Economic Society Annual Conference (Warwick) for comments. The usual disclaimer applies. The views expressed in this paper are those of the authors and should not be thought to represent those of the Bank of England or Bank of Spain. Copies of working papers may be obtained from Publications Group, Bank of England,

Following Meade (1978), we reconsider issues in the design of taxes on corporate income. We outline developments in economies and in economic thought over the last thirty years, and investigate how these developments should affect the design of taxes on corporate income. We consider a number of tax systems which have been proposed, distinguishing them in two main dimensions: the definition of what is to be taxed, and where it is to be taxed. We propose that a tax levied on economic rent accruing in the corporate sector, and on a destination basis, merits serious consideration. We discuss alternative approaches, including both R-based and R+F-based flow-of-funds taxes and an ACE allowance. It is the destination basis – with border adjustments for exports and imports – which primarily distinguishes our proposals from those of Meade (1978).

We derive the quantitative implications of growth theory for U.S. corporate equity plus net debt over the period 1960–2001. There were large secular movements in corporate equity values relative to GDP, with dramatic declines in the 1970s and dramatic increases starting in the 1980s and continuing throughout the 1990s. During the same period, there was little change in the capital-output ratio or earnings share of output. We ask specifically whether the theory accounts for these observations. We find that it does, with the critical factor being changes in the U.S. tax and regulatory system. We find that the theory also accounts for the even larger movements in U.K. equity values relative to GDP in this period.

U.S. stock prices have increased much faster than gross domestic product (GDP) in the postwar period. Between 1962 and 2000, corporate equity value relative to GDP nearly doubled. In this paper, we determine what standard growth theory says the equity value should be in 1962 and 2000, the two years for which our steady-state assumption is a reasonable one. We find that the actual valuations were close to the theoretical predictions in both years. The reason for the large run-up in equity value relative to GDP is that the average tax rate on dividends fell dramatically between 1962 and 2000. We also find that, given legal constraints that effectively prohibited the holding of stocks as reserves for pension plans, there is no equity premium puzzle in the postwar period. The average returns on debt and equity are as theory predicts.

We develop a dynamic general equilibrium model to study the impact of the 2003 dividend and capital gains tax cuts. Firms are heterogeneous in productivity and make investment and financing decisions subject to capital adjustment costs, equity issuance costs, and collateral constraints. Our calibrated model predicts that when the tax cuts are unexpected and temporary, dividend payments rise immediately by about 35 percent (relative to the level in the initial steady state). In the expiration date of the tax cuts, dividend payments decrease by about 15 percent. Aggregate investment decreases in the periods when the tax cuts are implemented, leading to an 11 percent drop in the period immediately prior to the expiration date of the tax cuts.

This paper analyzes the interaction between corporate taxes and corporate governance. We show that the characteristics of a taxation system impact the size of private benefits managers are able to extract. A higher tax rate increases the amount of income a manager would divert, while stronger tax enforcement reduces it and, in so doing, can raise the stock market value of a company in spite of the increase in the tax burden. We also show that the corporate governance system affects the level and sensitivity of tax revenues to tax changes. When the corporate governance system is ineffective (i.e., when it is easy to divert income) or when ownership concentration levels are high, an increase in the tax rate can reduce tax revenues generating a corporate version of the Laffer-curve. We test the Laffer-curve predictions in a panel of countries. Consistent with the model, we find that corporate tax rate increases have smaller (in fact, negative) effects on revenues when ownership is more concentrated and corporate governance is worse.

JEL No. H3, G3 This paper analyzes the effects of dividend taxation on corporate behavior using the large tax cut on individual dividend income enacted in 2003. Using data spanning 1980 to 2004-Q2, we document a sharp and widespread surge in dividend payments following the tax cut, along several dimensions. First, an unprecedented number of firms initiated regular dividend payments after the reform. As a result, the number of publicly traded firms paying dividends, after having declined continuously for more than two decades, began to increase precisely in 2003. Second, many firms that were already paying dividends prior to the reform raised regular dividend payments significantly. Third, special dividends also rose. All of these effects are robust to introducing controls for profits and other firm characteristics. Additional evidence for specific groups of firms suggests that the tax cut induced

This paper offers preliminary evidence and will be extended and completed as soon as more data is available.

This paper analyzes the effects of dividend taxation on corporate behavior using the large tax cut on individual dividend income enacted in 2003. We document a 20 percent increase in dividend payments by nonfinancial, nonutility publicly traded corporations following the tax cut. An unusually large number of firms initiated or increased regular dividend payments in the year after the reform. As a result, the number of firms paying dividends began to increase in 2003 after a continuous decline for more than two decades. Firms with high levels of nontaxable institutional ownership did not change payout policies, supporting the causality of the tax cut in increasing aggregate dividend payments. The response to the tax cut was strongest in firms with strong principals whose tax incentives changed (those with large taxable institutional owners or independent directors with large share holdings), and in firms where agents had stronger incentives to respond (high share ownership and low options ownership among top executives). Hence, principal-agent issues appear to play an important role in corporate responses to taxation. I.