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Intertemporal Income Shifting in Expectation of Lower Corporate Tax Rates: The Tax Reforms in Central and Eastern Europe


  • Boryana Madzharova


This paper examines if firms shift income out of years with high corporate tax rates into years when tax cuts are anticipated. Such intertemporal shifting can be one explanation for the stability of corporate tax revenues in Central and Eastern Europe, despite the major decline in the corporate tax rates and overall narrowing of the tax base starting in the late 90s. Using firm-level panel data for Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia from 1999 to 2005, the estimates indicate that the lower corporate tax rates induced a considerable increase in taxable income. Most of this increase, however, was due to short-term shifting of income to years with lower tax rates leading to non-transitory responses ranging from zero to .151, depending on the specification employed. Splitting the sample by firm size shows that income shifting is an appealing tax saving strategy for small and to a lesser extent medium-sized enterprises, but not for big firms. A further disaggregation by country reveals that the driving country behind the results is Romania.

Suggested Citation

  • Boryana Madzharova, 2012. "Intertemporal Income Shifting in Expectation of Lower Corporate Tax Rates: The Tax Reforms in Central and Eastern Europe," CERGE-EI Working Papers wp462, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp462

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    References listed on IDEAS

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    More about this item


    corporate tax; income shifting; tax reforms; Central and Eastern Europe;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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