Dividend Taxes and Investment Spending: Are Banks Different?

Abstract

We test whether and how commercial bank lending responded to a large dividend tax cut in 2003. While the Jobs Growth and Tax Relief Reconciliation Act (JGTRRA) was billed as a supply-side stimulus, studies of this legislation have failed to detect any increases in capital spending at nonfinancial firms. In contrast, we find strong increases in loan supply following the tax cut at publicly traded banks, though not at privately held banks. Dividend payouts increased at both sets of banks. Our results provide at least some support for all three branches of dividend tax theory.