Macro Seminar - Chung Tran (ANU)
Title: Dividend Imputation, Investment and Capital Accumulation in Open Economies with Sebastian Wende
Abstract: A dividend imputation system is designed to address double taxation of company income/profits by allowing companies to pass on profit taxes to shareholders in form of franking tax credits. In this paper, we study implications of dividend imputation in a small open economy model with heterogeneous firms and overlapping generations of households. Our analytical analysis indicates that dividend imputation results in opposing effects on investment: one that reduces tax on capital and induces more saving and investment and one that raises investment costs for firms that are not fully imputed and leads to less investment. Our quantitative analysis reveals that the positive force is dominant and results in higher capital accumulation. Interestingly, different tax treatments for resident and foreign investors amplify frictions in capital allocation, which prevents inflows of foreign capital from fully offsetting the shortage of domestic savings. International investors are not marginal investors in our small open economy setting. Overall, eliminating dividend imputation raises tax revenue but results in decreases in domestic savings, aggregate capital and output. Low income households benefit more from lump-sum transfers funded by additional revenue; meanwhile, high income households bear higher burden of double taxation.