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The Impact of Dividend Taxation on Dividends and Investment: New Evidence Based on a Natural Experiment

  • Seppo Kari
  • Hanna Karikallio
  • Jukka Pirttilä

There is a lack of clear evidence of the ways in which dividend taxation affects dividend distributions and investment since 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 differences-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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-08/cesifo1_wp2756.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2756.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2756
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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. Alan J. Auerbach, 1980. "Wealth Maximization and the Cost of Capital," NBER Working Papers 0254, National Bureau of Economic Research, Inc.
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  5. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
  6. James J. Heckman & Hidehiko Ichimura & Petra E. Todd, 1997. "Matching As An Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Oxford University Press, vol. 64(4), pages 605-654.
  7. Jeffrey Smith & Petra Todd, 2003. "Does Matching Overcome Lalonde's Critique of Nonexperimental Estimators?," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 20035, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
  8. 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.
  9. Anton Korinek & Joseph E. Stiglitz, 2008. "Dividend Taxation and Intertemporal Tax Arbitrage," NBER Working Papers 13858, National Bureau of Economic Research, Inc.
  10. Raj Chetty & Emmanuel Saez, 2007. "An Agency Theory of Dividend Taxation," NBER Working Papers 13538, National Bureau of Economic Research, Inc.
  11. 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.
  12. 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.
  13. Peter Sørensen, 2005. "Neutral Taxation of Shareholder Income," International Tax and Public Finance, Springer, vol. 12(6), pages 777-801, November.
  14. 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.
  15. 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.
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