GROSS PROFIT TAXATION VERSUS DISTRIBUTED PROFIT TAXATION AND FIRM PERFORMANCE: EFFECTS OF ESTONIA’S CORPORATE INCOME TAX REFORM

Jaan Masso, Jaanika Meriküll and Priit Vahter

No 81, University of Tartu - Faculty of Economics and Business Administration Working Paper Series from Faculty of Economics and Business Administration, University of Tartu (Estonia)

Abstract: Systems 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.

Keywords: corporate income tax; capital structure; liquidity; investments; productivity; comparative economic development (search for similar items in EconPapers)
JEL-codes: D22 H25 H32 O16 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2011
New Economics Papers: this item is included in nep-acc, nep-eur, nep-pub and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Gross profit taxation versus distributed profit taxation and firm perfomance: effects of Estonia,s corporate income tax reform (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:mtk:febawb:81

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