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Non-linear dividend tax and dynamics of the firm

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  • Kari, Seppo
  • Laitila, Jussi

Abstract

This paper analyses the implications of a non-linear dividend tax in a life-cycle model of the firm. In the model new firms first enter markets, then grow, financing from retained earnings and finally distribute their profits in the steady state. We find that under a non-linear tax the owners prefer a smooth flow of dividends, which encourages the firms to start distributions right from the beginning. This slows down investments and leads to delayed growth of production. There is, however, an opposing effect resulting from an increase in the start-up size of the firm, which speeds growth. Simulations nevertheless show that a revenue-neutral switch from a linear to a progressive tax exacerbates production losses. We further find that this distortion can be substantially reduced by carrying forward unused tax allowances with interest. Second Edition, updated 26.11.2014

Suggested Citation

  • Kari, Seppo & Laitila, Jussi, 2012. "Non-linear dividend tax and dynamics of the firm," Working Papers 41, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:41
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    Cited by:

    1. Rainer Niemann & Mariana Sailer, 2023. "Is analytical tax research alive and kicking? Insights from 2000 until 2022," Journal of Business Economics, Springer, vol. 93(6), pages 1149-1212, August.

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    More about this item

    Keywords

    dividend tax; progressive tax; nucleus theory; firm behavior; Taxation; Verotus; Taxation and Social Transfers; Julkisen talouden rahoitus ja tulonsiirrot; G350 - Payout Policy; H240 - Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes; H320 - Fiscal Policies and Behavior of Economic Agents: Firm;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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