The Effects of Corporate Taxes on Small Firms

VATT Institute for Economic Research Working Papers 129

45 Pages Posted: 2 Apr 2020

See all articles by Jarkko Harju

Jarkko Harju

Government of the Republic of Finland - VATT Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Aliisa Koivisto

VATT Institute for Economic Research; University of Helsinki

Tuomas Matikka

VATT Institute for Economic Research

Date Written: March 6, 2020

Abstract

We study the impact of corporate taxes on firm-level investments, total output and input usage by exploiting a 4.5 percentage-point corporate tax rate cut in Finland in 2014. We use detailed administrative data and a differences-in-differences method comparing small corporations (tax rate cut) to similar partnerships (no change in tax incentives). We find no significant investment responses. However, we observe an increase in annual sales and variable costs, suggesting that corporate tax rates have an effect on business activity. The effects are driven by entrepreneurs who actively work in their firm, suggesting that the tax cut increased entrepreneurial effort.

Keywords: corporate taxation, investments, business activity, small firms

JEL Classification: G31, G38, H21, H25

Suggested Citation

Harju, Jarkko and Koivisto, Aliisa and Matikka, Tuomas, The Effects of Corporate Taxes on Small Firms (March 6, 2020). VATT Institute for Economic Research Working Papers 129, Available at SSRN: https://ssrn.com/abstract=3551017 or http://dx.doi.org/10.2139/ssrn.3551017

Jarkko Harju (Contact Author)

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

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

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Aliisa Koivisto

VATT Institute for Economic Research ( email )

University of Helsinki ( email )

University of Helsinki
Helsinki, FIN-00014
Finland

Tuomas Matikka

VATT Institute for Economic Research ( email )

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

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