Dividend Taxes, Household Heterogeneity, and the US Great Depression

Jiang, Lunan (2015): Dividend Taxes, Household Heterogeneity, and the US Great Depression.

Abstract

As shown by McGrattan (2012), an anticipated increase in dividend taxes plays an important role in explaining the dramatic investment decline during the U.S. Great Depression. This paper attempts to investigate whether this is still robust to a model with household heterogeneity and precautionary saving motives. I build an Aiyagari model with dynamic firms,dividend taxes, and labor productivity shocks, which are calibrated to account for the U.S. earnings and wealth Inequality during the Great Depression using 1930s data. The conclusion is that the impact of anticipated increases in dividend taxes is very sensitive to the presence of household heterogeneity. The quantitative results show that, in the presence of household heterogeneity, the predicted investment is 50% smaller than in the standard business cycle model proposed by McGrattan (2012). The decline in output and working hours also become much less significant. Intuitively, although the anticipated hike in dividend taxes diminishes the expected return to the investment, it also shrinks the total assets that households use for self-insurance against the highly persistent idiosyncratic shocks. In order to retain the desired asset level, precautious households keep their savings at a lower capital return and the model ultimately generates a lower aggregate investment decline.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dividend Taxes, Household Heterogeneity, Investment, and the U.S. Great Depression
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

References

S. Rao Aiyagari. Uninsured idiosyncratic risk and aggregate saving. The Quarterly Journal of Economics, 109(3):659{684, 1994. doi: 10.2307/2118417. URL

Alan J. Auerbach and James R. Hines. Anticipated tax changes and the timing of investment. Working Paper 1886, National Bureau of Economic Research, September 1988. URL:http://www.nber.org/papers/w1886.

Ana Castaeda, Javier Daz-Gimnez, and Jos-Vctor Ros-Rull. Accounting for the u.s. earnings and wealth inequality. Journal of Political Economy, 111(4):pp. 818{857, 2003. ISSN 00223808. URL http://www.jstor.org/stable/10.1086/375382.

Harold L. Cole and Lee E. Ohanian. The great depression in the united states from a neoclassical perspective. Federal Reserve Bank of Minneapolis Quarterly Review, 23:2{24, 1999.

Thomas F. Cooley and Edward C. Prescott. Business Growth and Business Cycles, chapter 1. Princeton University Press, 1995.26

Marcia Marley Edward N. Wolf. The Measurement of Saving, Investment, and Wealth, chapter Long-Term Trends in U.S. Wealth Inequality: Methodological Issues and Results, pages 765 { 844. University of Chicago Press, 1989.

Raymond W Goldsmith, Dorothy S. Brady, and Horst Mendershausen, editors. A Study of Savings in the United States, volume III. Princeton University Press, 1956.

Selma F. Goldsmith. Changes in the size of of distribution in income. In Inequality and Poverty. W.W.Norton&Company.Inc, 1967.

Francois Gourio and Jianjun Miao. Firm heterogeneity and the long-run effects of dividend tax reform. American Economic Journal: Macroeconomics, 2(1):131{68, January 2010.

Francois Gourio and Jianjun Miao. Transitional dynamics of dividend and capital gains tax cuts. Review of Economic Dynamics, 14(2):368{383, April 2011.

Douglas H. Joines. Estimates of effective marginal tax rates on factor incomes. Journal of Business, 54(2):191226, 1981.

Arnold J. Katz and Shelby W. Herman. Improved estimates of fixed reproducible tangible wealth, 1929-1995. SURVEY OF CURRENT BUSINESS, 77(5):69{92, May 1997.

Willford I. King. The Wealth and Income of the People in the United States. New York: Macmillan, 1915.

Simon Kuznets. Economic growth and income inequality. The American Economic Review, 45(1):pp. 1{28, 1955. ISSN 00028282. URL http://www.jstor.org/stable/1811581.

Peter H. Lindert. Chapter 3 three centuries of inequality in britain and america. volume 1 of Hand- book of Income Distribution, pages 167 { 216. Elsevier, 2000. doi: 10.1016/S1574-0056(00)80006- 8. URL http://www.sciencedirect.com/science/article/pii/S1574005600800068.

Ellen R. McGrattan. Capital taxation during the u.s. great depression. Working Paper 16588, National Bureau of Economic Research, December 2010. URL http://www.nber.org/papers/w16588. 27

Lindert P. H. and J. G. Williamson. Three centuries of american inequality. In P. Uselding, editor, Research in Economic History, volume 1. Conn. : Johnson Associates, 1976.

Josep Pijoan-Mas, Antonia Diaz, and Jose-Victor Rios-Rull. Habit formation: Inplications for the wealth distribution. EconomicsWorking Papers we015114, Universidad Carlos III, Departamento de Economa, December 2001. URL http://ideas.repec.org/p/cte/werepe/we015114.html.

Thomas Piketty and Emmanuel Saez. The evolution of top incomes: A historical and international perspective. The American Economic Review, 96(2):pp. 200{205, 2006. ISSN 00028282. URL http://www.jstor.org/stable/30034642.

Jefrey G. Williamson and Peter H. Lindert. Long-Term Trends in American Wealth Inequality, volume Modeling the Distribution and Intergenerational Transmission of Wealth, chapter Modeling the Distribution and Intergenerational Transmission of Wealth, pages 9 { 94. University of Chicago Press, 1980.