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Cover of: Nonlinear Dividend Tax and the Dynamics of the Firm
Seppo Kari, Jussi Laitila

Nonlinear Dividend Tax and the Dynamics of the Firm

Section: Articles
Volume 71 (2015) / Issue 2, pp. 153-177 (25)
Published 09.07.2018
DOI 10.1628/001522115X142951441925
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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).