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On the Double Taxation of Corporate Profits

Listed author(s):
  • Alexis Anagnostopoulos
  • Orhan Erem Atesagaoglu
  • Eva Carceles-Poveda

This paper studies the aggregate and distributional effects of switching from taxing corporate profits at the firm level to taxing them at the household level, in the form of dividend and capital gains taxes. It is argued that a careful analysis of the relevant trade-offs necessitates the construction of a model that incorporates substantial heterogeneity across households and across firms. Such a model is constructed and used to evaluate the effects of several alternative reforms, where the main focus is on how to finance a reduction in corporate profits taxes. It is shown that using shareholder taxes to finance such a tax cut represents a better alternative to using labor income taxes, because it generates welfare benefits for a majority of households and can thus gather popular support. Focusing on shareholder taxes, the option of increasing dividend taxes only is evaluated against another alternative in which both dividend and capital gains taxes are increased. The former reform has the unintended consequence of creating misallocation of capital and this reduces the overall welfare benefits. The latter reform avoids introducing this distortion and is found to be the best alternative. In this scenario, a complete elimination of corporate profits taxes leads to an increase in long run output of approximately 2% and welfare gains equivalent to 1% of consumption. A less dramatic reform, in which the tax rates on all types of personal income as well as on corporate income are equalized, yields smaller overall benefits but is found to benefit more than 95% of households in the economy.

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File URL: http://www.sunysb.edu/economics/research/papers/2014/DoubleTaxation.pdf
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Paper provided by Stony Brook University, Department of Economics in its series Department of Economics Working Papers with number 14-03.

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Date of creation: 2014
Handle: RePEc:nys:sunysb:14-03
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Stony Brook, NY 11794-4384

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Web page: http://www.stonybrook.edu/commcms/economics/
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  1. François Gourio & Jianjun Miao, 2010. "Firm Heterogeneity and the Long-Run Effects of Dividend Tax Reform," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 131-168, January.
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  4. Julio Dávila & Jay H. Hong & Per Krusell & José‐Víctor Ríos‐Rull, 2012. "Constrained Efficiency in the Neoclassical Growth Model With Uninsurable Idiosyncratic Shocks," Econometrica, Econometric Society, vol. 80(6), pages 2431-2467, November.
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  8. Dammon, Robert M & Spatt, Chester S & Zhang, Harold H, 2001. "Optimal Consumption and Investment with Capital Gains Taxes," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 583-616.
  9. Chen, Daphne & Qi, Shi & Schlagenhauf, Don E., 2017. "Corporate Income Tax, Legal Form of Organization, and Employment," Working Papers 2017-21, Federal Reserve Bank of St. Louis.
  10. Javier Díaz-Giménez & Andrew Glover & José-Víctor Ríos-Rull, 2011. "Facts on the distributions of earnings, income, and wealth in the United States: 2007 update," Quarterly Review, Federal Reserve Bank of Minneapolis.
  11. Ana Castaneda & Javier Diaz-Gimenez & Jose-Victor Rios-Rull, 2003. "Accounting for the U.S. Earnings and Wealth Inequality," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 818-857, August.
  12. Anagnostopoulos, Alexis & Cárceles-Poveda, Eva & Lin, Danmo, 2012. "Dividend and capital gains taxation under incomplete markets," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 599-611.
  13. Eva Carceles-Poveda & Daniele Coen-Pirani, 2009. "Shareholders' Unanimity With Incomplete Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 577-606, May.
  14. Hans Fehr & Sabine Jokisch & Ashwin Kambhampati & Laurence J. Kotlikoff, 2013. "Simulating the Elimination of the U.S. Corporate Income Tax," NBER Working Papers 19757, National Bureau of Economic Research, Inc.
  15. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
  16. Juan Carlos Conesa & Begoña Domínguez, 2009. "Intangible Capital and Ramsey Capital Taxation (updated)," Working Papers 282, Barcelona Graduate School of Economics.
  17. Marika Santoro & Chao Wei, 2011. "Taxation, Investment and Asset Pricing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 443-454, July.
  18. Orhan Erem Atesagaoglu, 2012. "Taxes, Regulations And The Corporate Debt Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(3), pages 979-1004, August.
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