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| How Does Dividend Tax Affect Corporate Investment: A Research Based on Differentiated Dividend Tax Policy |
| MA Guangrong, YIN Haoru, ZHAO Yaohong
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School of Finance / China Financial Policy Research Center, Renmin University of China;
School of Government, University of International Business and Economic |
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Abstract Dividend tax is a core tax category levied on capital income within the framework of individual income tax, occupying a significant position in the current tax structure of China. However, there has been a long-standing debate over how dividends should be taxed, as it involves a stark equity-efficiency trade-off. On the one hand, property income such as dividends, accounts for a large portion of the income of high-income groups. Taxing dividends could help regulate income distribution. On the other hand, dividend taxation may lead to substantial efficiency losses, primarily manifested in investment. Since investors' net returns were reduced, dividend taxes may reduce investment and distort resource allocation. In view of this trade-off, it is essential to know the impact of dividend taxation on corporate behavior, especially on corporate investment behavior. However, how dividend taxation affects companies' real activities has been controversial in public finance. What exactly is the impact of dividend tax rate changes on the investment behavior of Chinese firms？ This remains an open empirical question.
This paper investigates this issue by examining the differentiated dividend tax reform implemented in China in 2013. Prior to the reform, individual investors of listed firms were subject to a uniform dividend tax rate of 10%. In this reform, however, China linked the dividend tax rate for individual investors to the duration of their shareholding, raising the dividend tax rate for short-term investments within one month and lowering the dividend tax rate for long-term investments over one year. As a result, although all listed firms were affected by the reform, the extent of the impact varied between firms with different investor structures, which allows us to employ a continuous difference-in-difference method to identify the causal relationship between dividend tax and corporate investment strategies. Using China A-share listed firms from 2011-2015 as the sample, this paper finds that changes in dividend taxes do not have a significant impact on firms' average investment. However, listed firms exhibit heterogeneous investment responses to an increase in dividend tax rate based on their varying levels of cash abundance. A higher dividend tax rate exacerbates the agency problem between managers and shareholders, leading to more unproductive investments by cash-rich firms. At the same time, cash-constrained firms reduce productive investments due to the rising cost of capital. This means that higher dividend tax rates lead to a shift in investment from higher-return investments in cash-constrained firms to lower-return investments in cash-rich firms, thereby reducing the efficiency of resource allocation.
The research findings in this paper have important implications for deepening tax system reform and optimizing investment structure. Noting that dividend tax is a crucial factor affecting investment structure and efficiency, the appropriate reduction of dividend tax rates, coupled with the coordination and integration of corporate income tax and individual income tax, would represent crucial tax reform directions that effectively balance high-quality development and common prosperity.
Possible contributions of this article are as follows. First, in terms of research perspective, while some literature has discussed the impact of China's differentiated dividend tax policy on other behavioral decisions such as corporate payout policies, no study has separately examined its effect on corporate investment decisions. This study contributes to a deeper understanding of the policy effects of China's dividend tax reform, which is of great importance for the improvement of China's tax system. Second, in terms of empirical identification, the differentiated dividend tax reform results in different investors' average dividend tax rates for listed firms with different investor structures, forming a natural grouping. This enables us to only use data from listed firms while identifying the impact of dividend tax on corporate investment, avoiding potential endogeneity issues that may arise when using firms with different organizational forms (e.g. non-listed firms) as the control groups, which thereby enhances the reliability of research conclusions. Third, in terms of content, this study examines the impact of dividend tax on corporate average investment, investment allocation, and investment efficiency under a new scenario of China, a developing country, providing new insights into the ongoing debate surrounding dividend tax. Moreover, unlike recent literature that primarily focuses on non-listed firms, this study addresses the issue within the sample of modern listed firms, where agency conflicts are more pronounced due to diffuse ownership. This should help deepen the understanding of the investment effect of dividend taxation in academia.
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Received: 23 February 2024
Published: 02 December 2025
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