Corporate Taxes

When a company earns a profit, it (generally) pays taxes on the profit. With the after-tax profit, it can either reinvest the proceeds in itself or distribute the money to shareholders in the form of dividends.

In other words, a tax on corporate profits is similar to a tax on capital gains (dividends) except that the latter encourage a company to invest in itself, whereas the latter leaves the incentive structure unchanged.

Another important difference is that taxes on capital income can be made progressive, whereas taxes on corporate profits cannot, because they can't account for who will eventually receive those profits.

Hence, the obvious solution is to start with an optimal dividend tax, take the lowest marginal rate, and make that the flat corporate profit tax (subtracting this rate from taxes on dividends). This allows you to reduce the aforementioned distortion that taxes on diviends create.

Because this makes the dividends tax less distortionary, this will (presumably) make it optimal to raise the dividend tax and corporate taxes a little bit more as a second-order effect.

But, in short, the optimal tax system will have some people pay 0% on capital gains taxes and some flat amount on corporate income taxes.

What a coincidence, under the US tax system people with incomes below $38,600 ($77,200 if married) don't pay income on qualified diviend income "title": "2018 Capital Gains Tax Rates — and How to Avoid a Big Bill".

Works Cited [show]