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Macroeconomic effects of zero corporate income tax on retained earnings

Author

Listed:
  • Jaan Masso

    (University of Tartu)

  • Jaanika Meriküll

    (Eesti Pank and University of Tartu)

Abstract

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.

Suggested Citation

  • Jaan Masso & Jaanika Meriküll, 2011. "Macroeconomic effects of zero corporate income tax on retained earnings," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 11(2), pages 81-99, December.
    • Handle: RePEc:bic:journl:v:11:y:2011:i:2:p:81-99
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    File URL: https://www.tandfonline.com/doi/epdf/10.1080/1406099X.2011.10840502
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    Citations

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    Cited by:

    1. 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.
    2. Hazans, Mihails & Pluta, Anna, 2020. "Tax incentives to encourage corporate investment in Latvia," MPRA Paper 118601, University Library of Munich, Germany.
    3. E. Sandoyan M. & H. Petrosyan G. & Э. Сандоян М. & Е. Петросян Г., 2019. "Последствия отмены налога на прибыль в Республике Армения // Abolishment of Proft tax Effects in the Republic of Armenia," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 23(1), pages 96-105.
    4. Karsten Staehr, 2014. "Corporate Income Taxation in Estonia. Is It Time to Abandon Dividend Taxation?," TUT Economic Research Series 9, Department of Finance and Economics, Tallinn University of Technology.

    More about this item

    Keywords

    corporate income tax; retained earnings; endogenous corporate finance; catching-up countries;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • P35 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Public Finance

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