Optimal Corporate Taxation Under Financial Frictions
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.
We would like to thank our discussants Brent Glover and Vish Viswanathan, Anat Admati, Vladimir Asriyan, Andy Atkeson, Juliane Begenau, John Campbell, V. V. Chari, John Cochrane, Peter DeMarzo, Sebastian Di Tella, Peter Diamond, Darrell Duffie, Emmanuel Farhi, Michael Faulkender, Xavier Gabaix, Piero Gottardi, Oleg Itskhoki, Anton Korinek, Hanno Lustig, Tim McQuade, Holger Mueller, Jonathan Parker, Adriano Rampini, Martin Schneider, Andy Skrzypacz, Jeremy Stein, Ludwig Straub, Aleh Tsyvinski, Felipe Varas, Iván Werning, as well as seminar and conference participants for helpful comments. All remaining errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Eduardo Dávila & Benjamin Hébert, 2023. "Optimal Corporate Taxation Under Financial Frictions," The Review of Economic Studies, vol 90(4), pages 1893-1933. citation courtesy of