Capital Gains Taxation and Corporate Investment

This study examines the interaction of dividend taxes and capital gains taxes from the sale of stock. Capital gains taxes produce lock-in, increasing the required rate of return for a sale and reinvestment. Using a model of the new view of the corporate tax, this study shows that the lock-in effect when stock is sold determines the optimal dividend payment, increasing the required rate of return for corporate investment. As a result, capital gains taxes on sales of stock increase dividend payments and reduce investment. The new view result, that dividend taxes do not affect investment, however, survives in this setting. The study also considers differences between dividends and repurchases and sales between heterogeneous investors, both which alter the tax incentives for sales and distributions.