The Effects of Corporate Taxes on Small Firms

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