IMF Working Papers

Fiscal Financing and Investment Irreversibility: The Role of Dividend Taxation

By Matteo Ghilardi, Roy Zilberman

May 2, 2025

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Matteo Ghilardi, and Roy Zilberman. "Fiscal Financing and Investment Irreversibility: The Role of Dividend Taxation", IMF Working Papers 2025, 083 (2025), accessed May 4, 2025, https://doi.org/10.5089/9798229008969.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We examine the macroeconomic, asset pricing, and public debt consequences of deficit financing dividend taxation in a dynamic general equilibrium model featuring partial investment irreversibility. Dividend taxes interact directly with the occasionally-binding irreversibility constraint, generating tax-augmented user-cost and hangover channels that both shape investment and debt-to-output fluctuations and account for a sizeable share of their long-run volatilities. Our analysis further reveals that debt-offsetting dividend tax hikes initially trigger investment inactivity through higher user-costs, followed by a surge driven by intertemporal tax arbitrage and hangover effects. Finally, debt-driven dividend tax rules amplify asset price fluctuations while delivering only modest fiscal revenue changes.

Subject: Corporate income tax, Dividend tax, Expenditure, Public debt, Tax law, Tax policy, Taxes

Keywords: Asset Prices, Corporate income tax, Deficit Financing, Dividend tax, Dividend Taxation, Investment Frictions, Public Debt., Tax law

Publication Details

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