Dividend and corporate income taxation with present-biased consumers

Abstract

Debates on the double taxation of dividends and corporate income have been long-standing. If double taxation were to be avoided, which type of tax policy would be more ideal? Conventional corporate theory based on microeconomic approaches does not yield a definitive answer, as either policy would distort firm investment and decrease firm value. Distinct from previous models, this paper addresses the double taxation issue in a macroeconomic context under a Laibson-type hyperbolic discounting model. In particular, this paper shows that in the hyperbolic economy, dividend taxes can improve consumer welfare, even though they decrease firm value. On the other hand, corporate income taxes negatively impact both consumers and firms. We also extend this result in an infinite-period steady-state model and show quantitative implications.