Non-linear dividend tax and dynamics of the firm

Seppo Kari and Jussi Laitila

No 41, Working Papers from VATT Institute for Economic Research

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

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, (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cmp, nep-pbe and nep-pub
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https://www.doria.fi/handle/10024/148779

Related works:
Journal Article: Nonlinear Dividend Tax and the Dynamics of the Firm (2015)
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