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Taxation, Growth and Welfare: Dynamic Effects of Estonia's 2000 Income Tax Act

By Michael Funke and Holger Strulik

Abstract

This paper analyses the long-run effects of Estonia’s 2000 Income Tax Act with a dynamic general equilibrium model. Specifically, we consider the impact of the shift from an imputation system to one where companies only pay taxes on distributed profits. Balanced growth paths, transitional dynamics and welfare costs are computed. Our results indicate that the 2000 Income Tax Act leads to higher per capita income and investment, but lower welfare. A sensitivity analysis shows that the results are rather robust.

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