Macroeconomic effects of zero corporate income tax on retained earnings
AbstractInternational tax competition had led to a lowering of corporate tax rates worldwide. Estonia was the first country to reduce the tax rate on retained earnings to zero, while distributed profits remained taxed at the pre-reform level. This paper seeks to analyse the effects of this unique tax reform implemented in year 2000. We apply a neoclassical exogenous growth general equilibrium model with an extension for endogenous corporate finance. Our findings indicate that the reform had a strong positive effect on capital accumulation and a modest positive effect on output and consumption, while preferential treatment of retained earnings increased equity finance and reduced debt finance.
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Bibliographic InfoArticle provided by Baltic International Centre for Economic Policy Studies in its journal Baltic Journal of Economics.
Volume (Year): 11 (2011)
Issue (Month): 2 (December)
corporate income tax; retained earnings; endogenous corporate finance; catching-up countries;
Find related papers by JEL classification:
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- P35 - Economic Systems - - Socialist Institutions and Their Transitions - - - Public Finance
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