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

41 Pages Posted: 23 Aug 2009

See all articles by Seppo Juhani Kari

Seppo Juhani Kari

Government of the Republic of Finland - VATT Institute for Economic Research

Hanna Karikallio

Pellervo Economic Research Institute, Helsinki

Jukka Pirttila

United Nations - World Institute for Development Economics Research (UNU/WIDER); Tampere University of Technology

Date Written: August 2009

Abstract

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.

Keywords: corporate income taxation, dividends, investment, tax reform

JEL Classification: H25, H32

Suggested Citation

Kari, Seppo Juhani and Karikallio, Hanna and Pirttila, Jukka, The Impact of Dividend Taxation on Dividends and Investment: New Evidence Based on a Natural Experiment (August 2009). CESifo Working Paper Series No. 2756. Available at SSRN: https://ssrn.com/abstract=1458882

Seppo Juhani Kari

Government of the Republic of Finland - VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

Hanna Karikallio

Pellervo Economic Research Institute, Helsinki ( email )

Eerikinkatu 28 A
Helsinki, 00180
Finland

Jukka Pirttila (Contact Author)

United Nations - World Institute for Development Economics Research (UNU/WIDER) ( email )

Katajanokanlaituri 6B
Helsinki, FIN-00160
Finland

Tampere University of Technology ( email )

P.O. 541, Korkeakoulunkatu 8 (Festia building)
Tampere, FI-33101
Finland

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