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Corporate Responses to Size-Based Tax Rates in Lithuania

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  • Garriga,Pablo
  • De Gouvea Scot De Arruda,Thiago

Abstract

This paper studies how firms respond to differential, size-based tax rates using administrativetax data in Lithuania. Exploiting a notch in the tax schedule faced by corporations, it documents strongbehavioral responses to tax incentives— revenue elasticity is estimated at 0.35 and cost elasticity at −1.3, implying alarge total profit elasticity of 7.4. It then leverages the panel structure of the data to provide insights on thedynamic effects of these tax incentives. Firms located close to but below the notch report systematically lower revenuegrowth in the short term, but the effects dissipate over time.

Suggested Citation

  • Garriga,Pablo & De Gouvea Scot De Arruda,Thiago, 2023. "Corporate Responses to Size-Based Tax Rates in Lithuania," Policy Research Working Paper Series 10500, The World Bank.
  • Handle: RePEc:wbk:wbrwps:10500
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    References listed on IDEAS

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    1. Philippe Aghion & Maxime Gravoueille & Matthieu Lequien & Stefanie Stantcheva, 2017. "Tax Simplicity or Simplicity of Evasion? Evidence from Self-Employment Taxes in France," NBER Working Papers 24049, National Bureau of Economic Research, Inc.
    2. E. Mark Curtis & Daniel G. Garrett & Eric C. Ohrn & Kevin A. Roberts & Juan Carlos Suárez Serrato, 2021. "Capital Investment and Labor Demand," NBER Working Papers 29485, National Bureau of Economic Research, Inc.
    3. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    4. Miguel Almunia & David Lopez-Rodriguez, 2018. "Under the Radar: The Effects of Monitoring Firms on Tax Compliance," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 1-38, February.
    5. Piza, Caio, 2018. "Out of the Shadows? Revisiting the impact of the Brazilian SIMPLES program on firms’ formalization rates," Journal of Development Economics, Elsevier, vol. 134(C), pages 125-132.
    6. Eric Ohrn, 2018. "The Effect of Corporate Taxation on Investment and Financial Policy: Evidence from the DPAD," American Economic Journal: Economic Policy, American Economic Association, vol. 10(2), pages 272-301, May.
    7. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 669-723.
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