Classical Corporation Tax as a Global Means of Tax Harmonization

Classical corporation tax entails double taxation of corporate income. The alternative practice to impute corporation tax to the domestic recipients of dividends is shown, in the case of a company with international owners, effectively to convert the imputation system back to a classical corporation tax. It also requires complex rules for exempting flow-through dividends from equalization tax to avoid the cumulation of corporation tax internationally. In contrast, classical corporation tax maintains its simplicity and can be designed so as to be neutral in respect of the financing and dividend decisions of multinationals, by adopting double taxation of interest income. Broad tax bases, flat-rate taxes on personal income from capital, and low statutory tax rates are advocated as general policy.

Anticipating Tax Change: Evidence from the Finnish Corporate Income Tax Reform of 2005

Using register-based panel data covering all Finnish firms in 1999-2004, we examine how corporations anticipated the 2005 dividend tax increase via changes in their dividend and investment policies. The Finnish capital and corporate income tax reform of 2005 creates a useful opportunity to measure this behaviour, since it involves exogenous variation in the tax treatment of different types of firms. The estimation results reveal that those firms that anticipated a dividend tax hike increased their dividend payouts by 10-50 per cent. This increase was not accompanied by a reduction in investment activities, but rather was associated with increased indebtedness in non-listed firms. The results also suggest that the timing of dividend distributions probably offsets much of the potential for increased dividend tax revenue following the reform.corporate income taxation, dividends, tax reform, anticipation effects

The Start-Up and Growth Stages in Enterprise Formation: The “New View” of Dividend Taxation Reconsidered

Early-stage uncertainty makes the initial cost of capital greater than the expansion-stage one. Tax effects on enterprise formation, entrepreneurial effort and quality, and on capital costs are derived. For an incorporated enterprise (i) the entrepreneur’s ability threshold rises with the tax rate of the corporate form, (ii) the initial cost of capital due to a dividend tax is above the old view double-tax one, (iii) the start-up investment is not affected by undervaluation, but the discouragement engendered by dividend taxation is compensated by realization-based capital gains tax, (iv) with undervaluation, the expansion-stage cost of capital corresponds to the Johansson-Samuelson tax which is lower than the new view suggests, (v) without undervaluation, the dividend tax boosts expansion investment.taxation of start-up enterprises

Nordic Dual Income Taxation of Entrepreneurs

The paper shows how entrepreneurial taxes interact with the career choice of individuals, the quality of entrepreneurs, and their effort and investments. It is particularly relevant to differentiate the early effects on start-up enterprises with substantial uncertainty from the tax effects on mature firms where the uncertainty is resolved. That is why the neutrality results of dividend taxation from mature company theory do not carry over to start-up enterprises. The Nordic dual model encourages (discourages) the establishment of new enterprises by entrepreneurs who anticipate high (low) profitability.dual income taxation, enterprise taxes

Literature review of the dynamic effects of corporate income taxation

This mimeo provides a literature review of corporate income taxation. The results in the literature are then used to try to understand the most likely implications of a Finnish corporate income tax rate cut in 2014. The literature identifies a number of margins that respond to corporate income taxation and suggests that profit-shifting and investment decisions are the most important decision margins for the corporate income tax base of a country. These margins are also the most relevant internationally as they make corporate tax bases interact across countries. From a government perspective the tax base responses are of great importance, because tax revenue diverges from that suggested by a static budget calculation. A corporate income tax cut is likely to increase the corporate tax base in the home country, but it is also likely to decrease corporate tax bases abroad. Thus a reduction in tax revenue is partially offset by a larger tax base. Part of this offsetting is, however, at the expense of other countries. The interaction between countries' tax bases encourages countries to enter into strategic considerations and to cut their corporate tax rates. Both of these have also been observed empirically. Finland implemented a change in the corporate income tax rate from 24.5% to 20% in the beginning of 2014. According to empirical estimates shown in the literature, about 50% of the tax revenue decrease following this tax rate cut is likely to be offset by behavioral responses. We point out a few caveats regarding these results. First, the empirical estimates are only approximations of the true effects and these effects may also differ across countries. Second, changes in the corporate income tax rate may also have equilibrium effects influencing prices, wages, hours of work, consumption and so on. These may affect the tax base responses to the tax rate change. For instance, if the tax rate change also increases hours worked, then the tax base increase is larger than when this effect is ignored. The equilibrium effects are beyond the scope of this mimeo.Tässä muistiossa tehdään kirjallisuuskatsaus yritysverotusta koskevaan taloustieteelliseen kirjallisuuteen ja pyritään tämän valossa arvioimaan Suomen yhteisöveron laskemisen mahdollisia seurauksia. Yritysverokirjallisuus tunnistaa useita eri tapoja, joilla yritykset reagoivat yhteisöveron muutoksiin. Näistä tärkeimpiä ovat voitonsiirrot ja ulkomaiset suorat investoinnit, jotka ovat myös kansainvälisesti merkittävimmät, koska näiden välityksellä eri maiden yritysveropohjat ovat yhteydessä toisiinsa. Valtion kannalta veropohjamuutokset ovat tärkeitä, koska niiden vuoksi verotulot poikkeavat staattisen laskelman mukaisista verotuloista. Samalla kun yhteisöveron lasku tyypillisesti kasvattaa kotimaista yhteisöveropohjaa ja rahoittaa näin itseään takaisin, se myös pienentää ulkomaisia yhteisöveropohjia. Veropohjan kasvu, joka tapahtuu osittain muiden maiden kustannuksella, kannustaa valtioita yhteisöverokannan strategiseen käyttämiseen. Tällaisesta strategisesta käyttäytymisestä, verokilpailusta maiden välillä onkin olemassa selkeää näyttöä. Suomessa yhteisöveroaste laski vuoden 2014 alusta 24,5 prosentista 20 prosenttiin. Taloustieteellisen kirjallisuuden tarjoamien estimaattien valossa veroasteen laskemisen itserahoitusaste olisi noin 50 prosenttia. Tuloksen taustalla on syytä huomioida seuraavat asiat: Empiiriset arviot sisältävät epävarmuutta, ja lisäksi ne voivat poiketa maittain. Yhteisöveroasteen laskemisella voi myös olla tasapainovaikutuksia, joiden vuoksi esimerkiksi hinnat, palkat, työtunnit ja kulutus voivat muuttua. Näiden seurauksena yhteisöveron muutoksen vaikutukset voivat muuttaa muotoaan merkittävästi. Jos esimerkiksi yhteisöveron muutos aiheuttaa myös työtuntien lisääntymistä, kasvaa veropohja enemmän kuin silloin, kun tämä on jätetty huomiotta. Tällaiset tasapainovaikutukset on jätetty tämän muistion ulkopuolelle

Investment Incentives in Closely Held Corporations and Finland's 2005 Tax Reform

This paper analyses the effects of the recent Finnish income tax reform on the behaviour of a closely held corporation (CHC) and its owners. The main elements of the reform are cuts in corporate and capital income tax rates and the replacement of the current full imputation system by a partial double taxation of distributed profits. Considerable exemptions are applied to relieve the taxation of dividends from CHCs. The analysis indicates that the change in the CHC's cost of capital depends on the marginal tax rate (MTR) of the owner. In the case of a high-MTR entrepreneur, the cost of capital increases or is retained at the present level while at lower MTRs the cost of capital may well decrease. The latter observation is due to the increase in the tax rate gap between earned income and capital income. Thus the reform does not remove the earlier reported nonneutralities of the Finnish tax system. The reform also improves the position of wage income as a form of compensation. This will cushion the effect of the dividend tax changes on the CHC's cost of capital.Tutkimuksessa arvioidaan vuoden 2005 alusta voimaan tulleen tuloverouudistuksen vaikutuksia harvainosakeyhtiön ja sen omistajien käyttäytymiseen. Uudistuksessa alennettiin yhteisö- ja pääomaverokantoja ja korvattiin yhtiöveron hyvitysjärjestelmä osinkojen osittaisella kahdenkertaisella verotuksella. Harvainosakeyhtiön osinkojen verotuksessa otettiin käyttöön tuntuvat huojennukset. Uudistuksen vaikutus yrityksen pääomakustannukseen riippuu ratkaisevasti yrittäjän ansiotulon rajaveroasteesta. Korkean rajaveroasteen tapauksessa pääomakustannus nousee lievästi tai pysyy entisellä tasolla. Rajaveroasteen ollessa matala pääomakustannus voi alentua merkittävästi, mikä johtuu uudistuksen aiheuttamasta ansiotulona verotettavan osingon ja pääomatulona verotettavan osingon rajaveroasteiden erotuksen kasvusta. Uudistus ei siten vähennä aiemmissa tutkimuksissa osoitettuja Suomen tuloverotuksen ohjausvaikutuksia. Uudistus tekee palkanmaksusta yrittäjälle hieman entistä houkuttelevamman korvausmuodon. Tämä vaimentaa lievästi veromuutosten vaikutuksia pääomakustannukseen

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