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

Abstract

Using register-based panel data covering all Finnish firms from 1999 to 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 in a statistically significant way. 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.

The Elasticity of Taxable Income and Income-Shifting: What is 'Real' and What is Not?

“…Nevertheless, from the point of view of business owners, various proposals and active public discussion increased the uncertainty surrounding the details of the 2005 tax reform. 15 For owners with progressively taxed dividends, there were large incentives to withdraw extra dividend income from the firm before the double taxation came into effect in 2005. However, many owners with flat-tax dividends also increased dividend payouts before 2005.…”

“…Second, dividends increased in both groups in a similar fashion before 2003, which indicates that there were no significant differences in pre-reform income trends. Third, 15 Kari et al (2008) discuss the various proposals and their details more thoroughly. 16 The predicted tax rate changes are defined similarly as the net-of-tax rate instruments (see Section 5.1 above).…”

Neutral taxation of shareholder income? Corporate responses to an announced dividend tax

“…The anticipation effects of this reform are analyzed in Kari, Karikallio and Pirttilä (2008). They document an increased dividend payout prior to the reform by firms that most likely would be affected by the new dividend tax.…”

Dividend Taxes and Decisions of MNEs: Evidence from a Finnish Tax Reform

“…losses, and the repeal of the taxation of individual net wealth (for more details, see Kari et al, 2008). …”

“…2 We also aim to contribute to the empirical analyses of the Finnish 2005 tax reform. Pirttilä (2008 and) examine the eects, but both studies concentrate only on owner-level changes in dividend taxation and ignore the changes in company-level tax structures such as EQT.…”