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

Author

Listed:
  • Seppo Kari

    (Government Institute for Economic Research)

  • Hanna Karikallio

    (Pellervo Economic Research Institute)

  • Jari Vainiomäki

    (School of Management, University of Tampere)

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 ividends 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.

Suggested Citation

  • Seppo Kari & Hanna Karikallio & Jari Vainiomäki, 2009. "The Impact of Dividend Taxation on Dividends and Investment: New Evidence Based on a Natural Experiment," Working Papers 0973, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:0973
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    File URL: http://urn.fi/urn:isbn:978-951-44-7814-7
    File Function: First version, 2009
    Download Restriction: no
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    Citations

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    Cited by:

    1. Erosa, Andrés & González, Beatriz, 2019. "Taxation and the life cycle of firms," Journal of Monetary Economics, Elsevier, vol. 105(C), pages 114-130.
    2. Jarkko Harju & Seppo Kari, 2017. "Dividend Taxes and Decisions of MNEs: Evidence from a Finnish Tax Reform," CESifo Economic Studies, CESifo Group, vol. 63(1), pages 45-77.
    3. Yu‐Fu Chen & Michael Funke, 2010. "Booms, Recessions And Financial Turmoil: A Fresh Look At Investment Decisions Under Cyclical Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(3), pages 290-317, July.
    4. Alstadsæter, Annette & Jacob, Martin & Michaely, Roni, 2017. "Do dividend taxes affect corporate investment?," Journal of Public Economics, Elsevier, vol. 151(C), pages 74-83.

    More about this item

    Keywords

    corporate income taxation; dividends; investment; tax reform;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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