Year: 2019
Type: report
Abstract: This paper studies the optimal design of corporate taxes when firms have private information about future investment opportunities and face financial constraints.A government whose goal is to efficiently raise a given amount of revenue from its corporate sector should attempt to tax unconstrained firms, which value resources inside the firm less than financially constrained firms.We show that a corporate payout tax (a tax on dividends and share repurchases) can both separate constrained and unconstrained firms and raise revenue, and is therefore optimal.Our quantitative analysis implies that a revenue-neutral switch from profit taxation to payout taxation would increase the overall value of existing firms and new entrants by 7%.This switch could be implemented in the current U.S. tax system by making retained earnings fully deductible.
DOI: 10.3386/w25520
Authors: Eduardo Dávila, Benjamin Hébert
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2904722588