A Schumpeterian Analysis of Decit-Financed Dividend Tax Cuts

I propose a Schumpeterian analysis of the e¤ects of a de…cit-…nanced cut of the tax rate on distributed dividends. I develop a very tractable model that allows me to study analytically transition dynamics and welfare, and complement the qualitative results with a quantitative assessment of the Job Growth and Taxpayer Relief Reconciliation Act (JGTRRA) of 2003. I …nd that the JGTRRA produces lower steadystate growth despite the fact that the economy’s saving and employment ratios rise. Most importantly, it produces a welfare loss. The mechanism that delivers these results is that the tax rate on distributed dividends distorts the returns to investing in the growth of existing product lines and in the development of new product lines. The quantitative exercise suggests that the JGTRRA will reduce welfare by 19.34% of annual consumption per capita, a substantial e¤ect driven by the fact that the steady-state growth rate falls from 2% to 1.08%. Keywords: Endogenous Growth, Market Structure, Dividends, Corporate Taxation. JEL Classi…cation Numbers: E10, L16, O31, O40 Address: Department of Economics, Duke University, Durham, NC 27708. Phone: (919) 6601807. Fax: (919) 6848974. E-mail: [email protected]