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The Impact of Fiscal Policy on Profits

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  • Margarita Katsimi
  • Vassilis Sarantides

Abstract

This paper investigates the impact of fiscal policy on profits using panel data for 19 high-income OECD countries during the period 1975-1999. We estimate a profit equation in which profits depend on a set of fiscal variables. Our empirical method is based on a consistent treatment of the government budget constraint, and we try to disentangle the effects of different spending and taxation items. As far as public spending is concerned, our results strongly suggest that capital expenditures are associated with higher profits, while expenditures on wages and salaries deteriorate profits. At the same time our results indicate that transport and communication expenditures increase profits, while the opposite holds for defense expenditures. On the revenue side, both direct and indirect taxation tend to decrease profits. However, a more detailed sub-division of direct taxation indicates that social security contributions have a neutral effect on profits.

Suggested Citation

  • Margarita Katsimi & Vassilis Sarantides, 2009. "The Impact of Fiscal Policy on Profits," CESifo Working Paper Series 2849, CESifo.
    • Handle: RePEc:ces:ceswps:_2849
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    2. Baldi, Guido & Forster, Stephan, 2019. "Political Budget Cycles: Evidence from Swiss Cantons," EconStor Preprints 195930, ZBW - Leibniz Information Centre for Economics.
    3. Fossen Frank M. & Steiner Viktor, 2018. "The Tax-rate Elasticity of Local Business Profits," German Economic Review, De Gruyter, vol. 19(2), pages 162-189, May.
    4. Simone Salotti & Carmine Trecroci, 2012. "Even worse than you thought: The effects of government debt on investment and productivity," EcoMod2012 4200, EcoMod.
    5. Athanasios Tagkalakis, 2014. "Discretionary fiscal policy and economic activity in Greece," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(4), pages 687-712, November.
    6. Thushyanthan Baskaran, 2021. "The revenue and base effects of local tax hikes: evidence from a quasi-experiment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(6), pages 1472-1518, December.
    7. Frank M. Fossen & Viktor Steiner, 2018. "The Tax†rate Elasticity of Local Business Profits," German Economic Review, Verein für Socialpolitik, vol. 19(2), pages 162-189, May.
    8. Simone Salotti & Carmine Trecroci, 2012. "Even Worse than You thought: The Impact of Public Debt on Aggregate Investment and Productivity," DEGIT Conference Papers c017_020, DEGIT, Dynamics, Economic Growth, and International Trade.
    9. Georgios Christou & Panagiotis Chronis, 2017. "Markups and fiscal policy: analytical framework and an empirical investigation," Working Papers 221, Bank of Greece.

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    More about this item

    Keywords

    fiscal policy; profits; quality of public expenditure;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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