Optimal Corporate Taxation Under Financial Frictions
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.
We would like to thank our discussant Vish Viswanathan, Anat Admati, Vladimir Asriyan, Andy Atkeson, V. V. Chari, John Cochrane, Peter DeMarzo, Sebastian Di Tella, Peter Diamond, Darrell Duffie, Emmanuel Farhi, Michael Faulkender, Piero Gottardi, Oleg Itskhoki, Anton Korinek, Hanno Lustig, Tim McQuade, Holger Mueller, Adriano Rampini, Martin Schneider, Andy Skrzypacz, Jeremy Stein, Felipe Varas, 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.