Abstract
This paper examines the effectiveness of the “end of double taxation” (on dividends) policy in stabilizing an economy. Both announced and unannounced policies are considered. A reduction in double taxation stimulates investment and improves welfare, but its impact on output is moderate and it has a negative effect on work hours. A temporary cut creates an investment boom but also generates an investment slump when the tax cut expires. Announcements of future tax cuts are found to have important effect on output dynamics. Agents respond to the tax policy even before it is implemented. If the tax cut is announced to be temporary, its impact on output is greatly reduced. Our study suggests that a temporary dividend tax cut is most effective in stabilizing a recession stricken economy when the policy change comes as “news” to the economy.
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