Distortions for Nothing Optimal Taxation of (Un)Distributed Profits

Etienne Lehmann () and Eddy Zanoutene ()
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Eddy Zanoutene: CY Cergy Paris Université, THEMA

No 2026-02, Thema Working Papers from THEMA (Théorie Economique, Modélisation et Applications), CY Cergy-Paris University, ESSEC and CNRS

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 inverseelasticity 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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Related works:
Working Paper: Distortions for Nothing - Optimal Taxation of (Un)Distributed Profits (2026)
Working Paper: Distortions for Nothing Optimal Taxation of (Un)Distributed Profits * (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:ema:worpap:2026-02

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