Dividend Imputation, Investment and Capital Accumulation in Open Economies

Speaker:  A/Prof Chung Tran

Affiliation: Australian National University

Online via Zoom: uqz.zoom.us/j/3568608618

Abstract 

A dividend imputation system is designed to address double taxation of company income/profit by allowing companies to pass on profit taxes to shareholders in form of franking tax credits, which potentially leads to more savings, investment and capital accumulation. We study this conjecture in a small open economy model with heterogeneous firms and overlapping generations of households. We show analytically that dividend imputation results in opposing effects on investment: one that reduces tax on capital income and induces more saving and investment and one that raises investment costs for firms that are not fully imputed and induces less investment. Calibrating our model to the Australia where a dividend imputation system was introduced in 1989, we find a significant increase in capital accumulation under dividend imputation. Interestingly, international investors are not marginal investors in our small open economy model with firm heterogeneity. Eliminating dividend imputation raises tax revenue, but decreases domestic savings and aggregate capital. Inflows of foreign capital do not fully offset reduction in domestic savings. High income households bear higher burden of double taxation of capital income, while low income households enjoy welfare gains from lump-sum transfers financed by additional tax revenue.

About the presenter's meeting

If you would like to meet with A/Prof Tran, please contact Dr Antonio Bellofatto