NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Optimal Corporate Taxation Under Financial Frictions

Eduardo Dávila, Benjamin M. Hébert

NBER Working Paper No. 25520
Issued in January 2019
NBER Program(s):Corporate Finance Program, Economic Fluctuations and Growth Program, Public Economics Program

We study optimal corporate taxation when firms are financially constrained. We describe a corporate taxation principle: taxes should be levied on unconstrained firms, which value resources inside the firm less than constrained firms. Under complete information, this principle completely characterizes optimal corporate tax policy. With incomplete information, the government can use payout policy to elicit whether a firm is constrained, and tax accordingly. In our static model, optimal corporate taxation can be implemented by a corporate dividend tax, and in our dynamic model, the optimal sequence of mechanisms can also be implemented by a corporate dividend tax.

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Document Object Identifier (DOI): 10.3386/w25520

 
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