The effects of corporate taxes on small firms

•We study the effects of a 6 percentage-point cut in the corporate tax in Finland.•We focus on the impacts on investments and business activity among small firms.•We find no average effect on capital investments.•We find an increase in business activity (sales and variable costs).•These effects are...

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Bibliographic Details
Published in:Journal of public economics 2022-08, Vol.212, p.104704, Article 104704
Main Authors: Harju, Jarkko, Koivisto, Aliisa, Matikka, Tuomas
Format: Article
Language:English
Subjects:
Business activity
Corporate taxation
Investments
Small firms
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Summary:•We study the effects of a 6 percentage-point cut in the corporate tax in Finland.•We focus on the impacts on investments and business activity among small firms.•We find no average effect on capital investments.•We find an increase in business activity (sales and variable costs).•These effects are driven by cash-constrained firms and firms with active owners. We study the impact of corporate taxes on firm-level investments and business activity by exploiting a 6 percentage-point reduction in the corporate tax rate in 2012–2014 in Finland. We use detailed administrative data and a difference-in-differences method comparing small corporations (tax rate cuts) to similar partnerships (no change in taxes). We find no significant average investment responses but do observe an average increase in annual sales (1.6%) and variable costs (2%) when comparing years before (2008–2011) and after (2014–2016) the tax rate cuts. These effects are driven by more cash-constrained firms and firms where the main owner actively works in the firm.
ISSN:0047-2727
1879-2316
DOI:10.1016/j.jpubeco.2022.104704