Macroeconomic effects of zero corporate income tax on retained earnings

Jaan Masso () and Jaanika Meriküll

Baltic Journal of Economics, 2011, vol. 11, issue 2, 81-99

Abstract: International tax competition had led to a lowering of corporate tax rates worldwide. Estonia was the first country to reduce the tax rate on retained earnings to zero, while distributed profits remained taxed at the pre-reform level. This paper seeks to analyse the effects of this unique tax reform implemented in year 2000. We apply a neoclassical exogenous growth general equilibrium model with an extension for endogenous corporate finance. Our findings indicate that the reform had a strong positive effect on capital accumulation and a modest positive effect on output and consumption, while preferential treatment of retained earnings increased equity finance and reduced debt finance.

Keywords: corporate income tax; retained earnings; endogenous corporate finance; catching-up countries (search for similar items in EconPapers)
JEL-codes: E21 H25 O16 P35 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:bic:journl:v:11:y:2011:i:2:p:81-99

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