Gross Profit Taxation Versus Distributed Profit Taxation And Firm Performance: Effects Of Estonia’S Corporate Income Tax Reform
AbstractSystems of profit taxation are undergoing continuous change and are subject to numerous studies. This paper estimates the effect of the corporate tax reform in Estonia in the year 2000, a reform that was unique anywhere. This reform nullified the taxation of retained earnings and retained the corporate income tax only on distributed profits. We estimate the effect of the reform on firms’ capital structure, liquidity, investments and productivity. 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, which are economically fairly similar to Estonia and have correlated business cycles. 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 results can be seen especially among the smaller companies affected by the liquidity constraints. 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, especially among companies in the services sector. The results imply that distributed profit taxation schemes may have significant positive effects on economic development and firms’ survival.
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Bibliographic InfoPaper provided by Faculty of Economics and Business Administration, University of Tartu (Estonia) in its series University of Tartu - Faculty of Economics and Business Administration Working Paper Series with number 81.
Length: 33 pages
Date of creation: 2011
Date of revision:
corporate income tax; capital structure; liquidity; investments; productivity; comparative economic development;
Other versions of this item:
- 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 wp2011-02, Bank of Estonia, revised 27 Apr 2011.
- 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, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ACC-2011-04-02 (Accounting & Auditing)
- NEP-ALL-2011-04-02 (All new papers)
- NEP-EUR-2011-04-02 (Microeconomic European Issues)
- NEP-PUB-2011-04-02 (Public Finance)
- NEP-TRA-2011-04-02 (Transition Economics)
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