TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, September 21, 2007

Dharmapala Comments on Bank's Dividends and Tax Policy in the Long-Run

I previously blogged Steve Bank's article, Dividends and Tax Policy in the Long-Run, 2007 U. Ill. L. Rev. 533 (2007).  The Illinois Law Forum has published a five-page ommentary on the article by Dhammika Dharmapala (UConn, Department of Economics):

Professor Bank reviews the theoretical and empirical literature on dividend taxation, and challenges the conventional wisdom about the consequences of making the 2003 dividend tax cut permanent. Two main conclusions emerge from Professor Bank’s analysis. First, even if the rise in dividend payments observed since 2003 is indeed attributable to the lower tax rate on dividends, it does not necessarily follow that making this tax cut permanent will increase or prolong the higher dividend payments. Indeed, under the “new view” of dividend taxation, firms may have responded to the tax cut by increasing dividends precisely because the tax cut was temporary; a permanent tax cut would, in contrast, have elicited no response. Second, efforts to influence corporate and managerial behavior through the tax system are at best fraught with difficulty, and may have counterproductive results. In the following discussion, my aim is to amplify these conclusions, while raising some questions and qualifications. Then, I focus on a neglected element of the 2003 reform, namely its international dimension.

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