Optimal Corporate Taxation Under Financial Frictions / Eduardo Dávila, Benjamin M. Hébert.

Format:

Book

Author/Creator:

Dávila, Eduardo.

Contributor:

National Bureau of Economic Research.

Hébert, Benjamin M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25520.

NBER working paper series no. w25520

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

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.

Notes:

Print version record

January 2019.