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On the Double Taxation of Corporate Profits (Anagnostopoulos et al.)

On the Double Taxation of Corporate Profits by Alexis Anagnostopoulos, Orhan Erem Atesagaoglu, Eva Cárceles-Poveda (9/2014).

This paper studies the aggregate and distributional effects of switching from taxing corporate profits at the firm level to taxing them at the household level, in the form of dividend and capital gains taxes. It is argued that a careful analysis of the relevant trade-offs necessitates the construction of a model that incorporates substantial heterogeneity across households and across firms. Such a model is constructed and used to evaluate the effects of several alternative reforms. Using shareholder taxes to replace corporate taxes provides a better alternative to using labor income taxes, because it generates welfare benefits for a majority of households. Focusing on shareholder taxes, the option of increasing dividend taxes only is evaluated against the alternative of increasing both dividend and capital gains taxes. The former reform has the unintended consequence of creating misallocation of capital whereas the latter does not, which makes it a better alternative. Eliminating corporate profits taxes in the latter case increases both long run output and welfare. A more moderate reform, in which the taxes on all types of personal income as well as corporate income are equalized, yields smaller overall welfare gains but is found to benefit more than 95% of households.

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