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Gross profit taxation versus distributed profit taxation and firm perfomance : effects of Estonia,s corporate income tax reform

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  • Jaan Masso
  • Jaanika Merikull
  • Priit Vahter

Abstract

This paper estimates the effect of the corporate tax reform in Estonia in the year 2000. This unique reform nullified the taxation of retained earnings and retained the corporate income tax only on distributed profits. The effect of the reform is identified by comparing the performance of Estonian firms that were affected with that of firms from Latvia and Lithuania, the two other Baltic states. We use firm-level financial data and the difference in differences and propensity score matching methods for our analysis. The results show that the corporate tax reform has resulted in increased holdings of liquid assets and lower use of debt financing. These developments have contributed positively to firms' survival during the recent global economic crisis. A positive effect on investment and labour productivity has also been found

Suggested Citation

  • Jaan Masso & Jaanika Merikull & 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 wp2011-02, Bank of Estonia, revised 27 Apr 2011.
    • Handle: RePEc:eea:boewps:wp2011-02
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    Cited by:

    1. Juan Carlos Cuestas & Karsten Staehr, 2013. "Fiscal shocks and budget balance persistence in the EU countries from Central and Eastern Europe," Applied Economics, Taylor & Francis Journals, vol. 45(22), pages 3211-3219, August.
    2. Egert Juuse, 2015. "“Latin Americanization” of the Estonian economy: institutional analysis of financial fragility and the financialization process," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 38(3), pages 399-425, October.
    3. Jack Mintz, 2022. "A Proposal for a "Big Bang" Corporate Tax Reform," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 15(7), February.
    4. Bizņa Valentīna & Jurušs Māris & Laizāns Tālis & Šnikvalds Roberts, 2018. "Assessment of Impact of Corporate Income Tax Suspension on Financial Performance of Businesses," Economics and Business, Sciendo, vol. 32(1), pages 172-181, September.
    5. Philip Bazel & Jack Mintz, 2021. "2020 Tax Competitiveness Report: Canada’S Investment Challenge," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 14(21), September.
    6. Egert Juuse & Rainer Kattel, 2014. "Financialisation and the Financial and Economic Crises: The Case of Estonia," FESSUD studies fstudy20, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    7. World Bank, 2017. "Georgia Public Expenditure Review," World Bank Publications - Reports 27138, The World Bank Group.
    8. 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.

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    More about this item

    Keywords

    corporate income tax; capital structure; liquidity; investments; productivity; comparative economic development;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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