The Effects of Tax Penalty on Retained Earnings: Evidence from Quasi-Natural Experiment in South Korea

Byun Yiseul (), Binh Ki Beom () and Woo Seokjin ()
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Byun Yiseul: Korea Institute of Public Finance, Sejong, Korea
Binh Ki Beom: Department of Economics, Myongji University, Seodaemun-gu 03674, K orea
Woo Seokjin: Department of Economics, Myongji University, Seodaemun-gu 03674, K orea

Asian Journal of Law and Economics, 2021, vol. 12, issue 3, 213-235

Abstract: This paper evaluated how the tax penalty, corporate income feedback tax (CIFT), on retained earnings affected firms’ managerial decisions in South Korea. We focused on how the firms allocated the retained earnings to minimize the additional tax liability. We employed a quasi-natural experiment design resulting from the enactment of the CIFT in 2015 to identify how the tax penalty on earning retention affected investment, dividend, and employment. We took advantage of the eligibility condition of the CIFT to construct a quasi-natural experimental design. Our estimation results show that most firms subject to the CIFT paid out dividends to equity holders to avoid additional tax liabilities despite of modest increase of investment. They did not change wages much. Rather, they decreased wage payment. In sum, the CIFT was not as successful as Korean government wished.

Keywords: corporate income feedback tax; retained earning; quasi-natural experiment; difference-in-differences (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/ajle-2021-0056

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