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Macroeconomic effects of zero corporate income tax on retained earnings

Listed author(s):
  • Jaan Masso


    (University of Tartu)

  • Jaanika Meriküll


    (Eesti Pank and University of Tartu)

International tax competition had led to a lowering of corporate tax rates worldwide. Estonia was the first country to reduce the tax rate on retained earnings to zero, while distributed profits remained taxed at the pre-reform level. This paper seeks to analyse the effects of this unique tax reform implemented in year 2000. We apply a neoclassical exogenous growth general equilibrium model with an extension for endogenous corporate finance. Our findings indicate that the reform had a strong positive effect on capital accumulation and a modest positive effect on output and consumption, while preferential treatment of retained earnings increased equity finance and reduced debt finance.

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Article provided by Baltic International Centre for Economic Policy Studies in its journal Baltic Journal of Economics.

Volume (Year): 11 (2011)
Issue (Month): 2 (December)
Pages: 81-99

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Handle: RePEc:bic:journl:v:11:y:2011:i:2:p:81-99
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