Do Payout Taxes Affect Real Activity? Evidence from Investment in R&D

Higher taxes on corporate payouts increase the cost of financing with stock issues. As a result, real activities that depend on equity financing should be particularly sensitive to payout taxation. For example, firms rely extensively on stock issues to fund R&D spending, making R&D a potentially important but unexplored mechanism through which payout taxes affect real economic activity. In a broad international panel and in the years surrounding a quasi-experimental dividend tax reform in Sweden, we document a robust negative association between payout tax rates and R&D. Higher payout taxes have a stronger negative effect on R&D in sectors and firms that are more equity dependent, but little to no effect on investment in physical capital, consistent with the equity financing mechanism we emphasize. Given the importance of R&D for innovation and long-run growth, our findings suggest that the economic consequences of capital income taxation are likely much larger than is generally recognized.