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The impact of dividend taxation on dividends and investment: New evidence based on a natural experiment

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  • Seppo Kari
  • Hanna Karikallio
  • Jukka Pirttilä

Abstract

There is a lack of clear evidence of the ways in which dividend taxation affects dividend distributions and investment and the evidence is based mainly on the behaviour of large listed companies. This paper utilises a large register-based panel data set, where the vast majority of firms are small and medium-sized enterprises, to examine the responses to the Finnish dividend tax increase of 2005. This reform creates a useful opportunity to measure enterprise behaviour, since it involves exogenous variation in the tax treatment of different types of firms. The results, based on difference-in-differences estimation and matching methods, indicate that dividends declined somewhat in closely held corporations that faced a tax increase, perhaps for timing reasons, while investments did not decline. These findings are more in line with the new rather than the old view of dividend taxation.

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Bibliographic Info

Paper provided by Government Institute for Economic Research Finland (VATT) in its series Working Papers with number 9.

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Date of creation: 08 Sep 2009
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Handle: RePEc:fer:wpaper:9

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Keywords: Corporate income taxation; dividends; investment; tax reform;

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  1. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Munich Reprints in Economics 19842, University of Munich, Department of Economics.
  2. B. Douglas Berhheim, 1991. "Tax Policy and the Dividend Puzzle," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 455-476, Winter.
  3. Kristiina Huttunen, 2007. "The Effect of Foreign Acquisition on Employment and Wages: Evidence from Finnish Establishments," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 497-509, August.
  4. 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, vol. 11(4), pages 469-485, 08.
  5. A. Smith, Jeffrey & E. Todd, Petra, 2005. "Does matching overcome LaLonde's critique of nonexperimental estimators?," Journal of Econometrics, Elsevier, vol. 125(1-2), pages 305-353.
  6. Annette Alstadsæter & Erik Fjærli, 2009. "Neutral taxation of shareholder income? Corporate responses to an announced dividend tax," International Tax and Public Finance, Springer, vol. 16(4), pages 571-604, August.
  7. Richard Blundell & Monica Costa Dias, 2000. "Evaluation methods for non-experimental data," Fiscal Studies, Institute for Fiscal Studies, vol. 21(4), pages 427-468, January.
  8. Anton Korinek & Joseph E. Stiglitz, 2008. "Dividend Taxation and Intertemporal Tax Arbitrage," NBER Working Papers 13858, National Bureau of Economic Research, Inc.
  9. Alvarez, Luis H. R. & Kanniainen, Vesa & Sodersten, Jan, 1998. "Tax policy uncertainty and corporate investment: A theory of tax-induced investment spurts," Journal of Public Economics, Elsevier, vol. 69(1), pages 17-48, July.
  10. Raj Chetty & Emmanuel Saez, 2007. "An Agency Theory of Dividend Taxation," NBER Working Papers 13538, National Bureau of Economic Research, Inc.
  11. Alan J. Auerbach, 1980. "Wealth Maximization and the Cost of Capital," NBER Working Papers 0254, National Bureau of Economic Research, Inc.
  12. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. 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.
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Citations

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Cited by:
  1. Kristiina Huttunen & Jenni Kellokumpu, 2012. "The Effect of Job Displacement on Couples? Fertility Decisions," Working Papers 29, Government Institute for Economic Research Finland (VATT).
  2. Ossi Korkeamäki & Tomi Kyyrä, 2010. "Institutional rules, labour demand and retirement through disability programme participation," Working Papers 16, Government Institute for Economic Research Finland (VATT).
  3. Yu-Fu Chen & Michael Funke, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," Dundee Discussion Papers in Economics 225, Economic Studies, University of Dundee.
  4. Seppo Kari & Jarkko Harju, 2011. "Dividend taxes and decisions of MNEs: Evidence from a Finnish tax reform," Working Papers 27, Government Institute for Economic Research Finland (VATT).
  5. Jaan Masso & Jaanika Meriküll & Priit Vahter, 2011. "Gross Profit Taxation Versus Distributed Profit Taxation And Firm Performance: Effects Of Estonia’S Corporate Income Tax Reform," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 81, Faculty of Economics and Business Administration, University of Tartu (Estonia).
  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 82, Faculty of Economics and Business Administration, University of Tartu (Estonia).
  7. Jarkko Harju & Tuomas Matikka, 2013. "Entrepreneurs and income-shifting: Empirical evidence from a Finnish tax reform," Working Papers 43, Government Institute for Economic Research Finland (VATT).
  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.
  9. Ossi Korkeamäki, 2011. "The Finnish payroll tax cut experiment revisited," Working Papers 22, Government Institute for Economic Research Finland (VATT).
  10. Annette Alstadsater & Knut Reidar Wangen, 2010. "Small Corporations' Income Shifting through Choice of Ownership Structure - a Norwegian Case," Finnish Economic Papers, Finnish Economic Association, vol. 23(2), pages 73-87, Autumn.

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