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

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  • Seppo Kari
  • Hanna Karikallio
  • Jukka Pirttilä

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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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2201.

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

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

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References

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  1. Alan J. Auerbach, 1986. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," NBER Working Papers 2103, National Bureau of Economic Research, Inc.
  2. 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, Mohr Siebeck, Tübingen, vol. 56(3/4), pages 285-, July.
  3. Seppo Kari & Hanna Karikallio, 2007. "Tax treatment of dividends and capital gains and the dividend decision under dual income tax," International Tax and Public Finance, Springer, Springer, vol. 14(4), pages 427-456, August.
  4. Chetty, Raj & Saez, Emmanuel, 2004. "Dividend Taxes and Corporate Behaviour: Evidence from the 2003 Dividend Tax Cut," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4722, C.E.P.R. Discussion Papers.
  5. Tobias Lindhe & Jan Södersten & Ann �berg, 2004. "Economic Effects of Taxing Different Organizational Forms under the Nordic Dual Income Tax," International Tax and Public Finance, Springer, Springer, vol. 11(4), pages 469-485, 08.
  6. Roger Gordon & Martin Dietz, 2006. "Dividends and Taxes," NBER Working Papers 12292, National Bureau of Economic Research, Inc.
  7. Korinek, Anton & Stiglitz, Joseph E., 2009. "Dividend taxation and intertemporal tax arbitrage," Journal of Public Economics, Elsevier, Elsevier, vol. 93(1-2), pages 142-159, February.
  8. Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2004. "Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut," NBER Working Papers 11002, National Bureau of Economic Research, Inc.
  9. 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, Institute for Fiscal Studies W05/17, Institute for Fiscal Studies.
  10. Casey, K Mike, et al, 1999. "Examining the Impact of the 1986 Tax Reform Act on Corporate Dividend Policy: A New Methodology," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 34(3), pages 33-46, August.
  11. Robert A. Moffitt & Mark Wilhelm, 1998. "Taxation and the Labor Supply: Decisions of the Affluent," NBER Working Papers 6621, National Bureau of Economic Research, Inc.
  12. 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.
  13. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, Elsevier, vol. 26(1), pages 107-121, February.
  14. 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.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Dividends and taxation
    by Tyler Cowen in Marginal Revolution on 2012-02-13 16:20:34
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Cited by:
  1. Jarkko Harju & Tuomas Matikka, 2013. "Entrepreneurs and income-shifting: Empirical evidence from a Finnish tax reform," Working Papers, Government Institute for Economic Research Finland (VATT) 43, Government Institute for Economic Research Finland (VATT).
  2. Annette Alstadsater & Knut Reidar Wangen, 2010. "Small Corporations' Income Shifting through Choice of Ownership Structure - a Norwegian Case," Finnish Economic Papers, Finnish Economic Association, Finnish Economic Association, vol. 23(2), pages 73-87, Autumn.
  3. Jacob, Martin, 2010. "Taxation, Dividends, and Share Repurchases: Taking Evidence Global," Working Paper Series, Center for Fiscal Studies, Uppsala University, Department of Economics 2010:10, Uppsala University, Department of Economics.
  4. Blundell, Richard & Francesconi, Marco & van der Klaauw, Wilbert, 2011. "Anatomy of Welfare Reform Evaluation: Announcement and Implementation Effects," IZA Discussion Papers 6050, Institute for the Study of Labor (IZA).
  5. Masso, Jaan & Meriküll, Jaanika & Vahter, Priit, 2013. "Shift from gross profit taxation to distributed profit taxation: Are there effects on firms?," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1092-1105.
  6. Anne Lauringson, 2011. "Unemployment Benefits In A Period Of Crisis: The Effect On Unemployment Duration," University of Tartu - Faculty of Economics and Business Administration Working Paper Series, Faculty of Economics and Business Administration, University of Tartu (Estonia) 82, Faculty of Economics and Business Administration, University of Tartu (Estonia).
  7. Annette Alstadsæter & Erik Fjærli, 2009. "Neutral taxation of shareholder income? Corporate responses to an announced dividend tax," International Tax and Public Finance, Springer, Springer, vol. 16(4), pages 571-604, August.
  8. Jaan Masso & Jaanika Meriküll & Priit Vahter, 2011. "Gross profit taxation versus distributed profit taxation and firm perfomance : effects of Estonia,s corporate income tax reform," Bank of Estonia Working Papers, Bank of Estonia wp2011-02, Bank of Estonia, revised 27 Apr 2011.
  9. Korkeamaki, Timo & Liljeblom, Eva & Pasternack, Daniel, 2010. "Tax reform and payout policy: Do shareholder clienteles or payout policy adjust?," Journal of Corporate Finance, Elsevier, Elsevier, vol. 16(4), pages 572-587, September.
  10. Jarkko Harju & Tuomas Matikka, 2013. "The elasticity of taxable income and income-shifting between tax bases: what is “real” and what is not?," Working Papers, Oxford University Centre for Business Taxation 1313, Oxford University Centre for Business Taxation.
  11. Seppo Kari & Jarkko Harju, 2011. "Dividend taxes and decisions of MNEs: Evidence from a Finnish tax reform," Working Papers, Government Institute for Economic Research Finland (VATT) 27, Government Institute for Economic Research Finland (VATT).
  12. Annette Alstadsæter & Knut Reidar Wangen, 2008. "Corporations’ Choice of Tax Regime when Transition Costs are Small and Income Shifting Potential is Large," CESifo Working Paper Series, CESifo Group Munich 2392, CESifo Group Munich.
  13. Seppo Kari & Jussi Laitila, 2012. "Non-linear dividend tax and dynamics of the firm," Working Papers, Government Institute for Economic Research Finland (VATT) 41, Government Institute for Economic Research Finland (VATT).

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