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

Etienne Lehmann and Eddy Zanoutene

No 12424, CESifo Working Paper Series from CESifo

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.

Keywords: corporate tax; dividend tax; optimal taxation; capital taxation (search for similar items in EconPapers)
JEL-codes: H21 H24 H25 H26 H32 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12424

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