Nonlinear Dividend Tax and the Dynamics of the Firm

Seppo Kari and Jussi Laitila

FinanzArchiv: Public Finance Analysis, 2015, vol. 71, issue 2, 153-177

Abstract: We analyze the implications of a nonlinear tax scheme for dividends using a life-cycle model of a firm. In this model new firms first enter markets; then grow internally, financing from retained earnings; and finally distribute their profits in the steady state. We find that under a nonlinear tax the owners prefer a smooth flow of dividends, which encourages firms to begin distributions right from the start. This early-distribution incentive (EDI) slows down investments and leads to delayed growth. Our calculations indeed confirm that a revenue-neutral switch from a linear to a progressive tax exacerbates production losses. We further demonstrate that this distortion can be reduced by carrying forward unused tax allowances with interest, as proposed e.g. by Mirrlees et al. (2011).

Keywords: dividend tax; progressive tax; investment; firm behavior; early-distribution incentive (search for similar items in EconPapers)
JEL-codes: D92 G35 H24 H32 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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Working Paper: Non-linear dividend tax and dynamics of the firm (2012)
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DOI: 10.1628/001522108X142951441925

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