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Anticipating Tax Change: Evidence from the Finnish Corporate Income Tax Reform of 2005

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Author Info
Seppo Kari ()
Hanna Karikallio ()
Jukka Pirttilä ()

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Abstract

Using register-based panel data covering all Finnish firms in 1999-2004, we examine how corporations anticipated the 2005 dividend tax increase via changes in their dividend and investment policies. The Finnish capital and corporate income tax reform of 2005 creates a useful opportunity to measure this behaviour, since it involves exogenous variation in the tax treatment of different types of firms. The estimation results reveal that those firms that anticipated a dividend tax hike increased their dividend payouts by 10-50 per cent. This increase was not accompanied by a reduction in investment activities, but rather was associated with increased indebtedness in non-listed firms. The results also suggest that the timing of dividend distributions probably offsets much of the potential for increased dividend tax revenue following the reform.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2201.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2201

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Related research
Keywords: corporate income taxation; dividends; tax reform; anticipation effects;

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References listed on IDEAS
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  1. Tobias Lindhe & Jan Södersten & Ann Öberg, 2004. "Economic Effects of Taxing Different Organizational Forms under the Nordic Dual Income Tax," Asia-Pacific Financial Markets, Springer, vol. 11(4), pages 469-485, August. [Downloadable!] (restricted)
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  2. Robert A Moffitt & Mark Wilhelm, 2000. "Taxation and the Labor Supply - Decisions of the Affluent," Economics Working Paper Archive 414, The Johns Hopkins University,Department of Economics.
    Other versions:
  3. Luis Alvarez & Vesa Kanniainen & Jan Södersten, 1999. "Why is the Corporation Tax Not Neutral?. Anticipated Tax Reform, Investment Spurts and Corporate Borrowing," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 56(3/4), pages 285-, July.
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  4. Roger Gordon & Martin Dietz, 2006. "Dividends and Taxes," NBER Working Papers 12292, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Steve Bond & Michael Devereux & Alexander Klemm, 2005. "Dissecting dividend decisions: some clues about the effects of dividend taxation from recent UK reforms," IFS Working Papers W05/17, Institute for Fiscal Studies. [Downloadable!]
  6. Raj Chetty & Emmanuel Saez, 2004. "Do Dividend Payments Respond to Taxes? Preliminary Evidence from the 2003 Dividend Tax Cut," NBER Working Papers 10572, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February. [Downloadable!] (restricted)
  8. Seppo Kari & Hanna Karikallio, 2007. "Tax Treatment of Dividends and Capital Gains and the Dividend Decision Under Dual Income Tax," Discussion Papers 416, Government Institute for Economic Research Finland (VATT). [Downloadable!]
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  9. Auerbach, Alan J, 1989. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 939-62, November. [Downloadable!] (restricted)
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  10. Raj Chetty & Emmanuel Saez, 2005. "Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 791-833, August.
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  11. Anton Korinek & Joseph E. Stiglitz, 2008. "Dividend Taxation and Intertemporal Tax Arbitrage," NBER Working Papers 13858, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Alan J. Auerbach & Kevin A. Hassett, 2005. "The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study," NBER Working Papers 11449, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2006. "Executive financial incentives and payout policy: firm responses to the 2003 dividend tax cut," Finance and Economics Discussion Series 2006-14, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
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