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Optimal Corporate Taxation Under Financial Frictions

Author

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  • Davila, Eduardo

    (Yale University/New York University and NBER)

  • Hebert, Benjamin

    (Stanford University and NBER)

Abstract

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.

Suggested Citation

  • Davila, Eduardo & Hebert, Benjamin, 2019. "Optimal Corporate Taxation Under Financial Frictions," Research Papers 3594, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3594
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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