Accumulated earnings tax (AET) is a tax imposed by tax authorities on corporations that retain earnings beyond a reasonable level, instead of distributing them as dividends to shareholders. This tax is designed to prevent companies from avoiding personal income taxes by accumulating earnings rather than distributing them.
Let us take an example. Imagine a company makes a lot of money and instead of distributing it as dividends to their owners and shareholders keeps it in the bank or reinvests it. The Government in such a case can say, that the company is keeping too much money to itself and not sharing it with the shareholders and can charge the company an extra tax on the piled-up earnings. This is done to encourage the companies to distribute their profits rather than hoarding them to avoid taxes on personal income for shareholders.
The concept of Accumulated earnings Tax is used in the field of Corporate taxation and Public Economics. It plays a role in determining fiscal policy and influences corporate dividend policies and shareholder income. It is used as a tool by the Government to ensure that profits are either reinvested for legitimate business reasons or distributed to shareholders who will then pay personal income taxes on their dividends.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy