Distortions for Nothing - Optimal Taxation of (Un)Distributed Profits*

Etienne Lehmann and Eddy Zanoutene

No 21102, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the optimal taxation of corporate and dividend income when entrepreneurs can use retained earnings to reduce their tax burden. We show that eliminating dividend taxes while increasing the corporate income tax (CIT) to keep investment unchanged raises total tax revenue. Our simulations suggest net revenue gains of 0.1-0.4% of GDP. In an infinite-horizon model, the optimal policy sets dividend taxes to zero in every period. As the discount factor approaches one and when the planner values only workers’ welfare, the optimal steady-state CIT converges to a standard inverse elasticity rule.

JEL-codes: H21 H24 H25 H26 H32 (search for similar items in EconPapers)
Date: 2026-01
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP21102 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21102

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP21102

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().