Doctoral defence: ”Essays on the Effects of Taxation on Firms”

September 20, 2021

On September 24th, M.Soc.Sc. Aliisa Koivisto will defend her doctoral dissertation ”Essays on the Effects of Taxation on Firms”.  The dissertation looks into three different tax policies aimed at promoting business activity. Using rich Finnish microdata and state-of-the-art econometric tools, the doctoral thesis investigates how firms respond to dividend tax, corporate tax, and a household tax credit.

In the first essay, she studies how business owners of privately held corporations respond to dividend taxes. By using bunching method, she finds exceptionally clear dividend payment responses to dividend tax schedule thresholds. Moreover, she examines the potential mechanisms driving the bunching using changes in the dividend tax thresholds. She finds no statistically significant responses in investment or output. Further descriptive analysis on the asset structures of the firms suggests that most of the payment response may be due to inter-temporal income-smoothing, as the balance sheets reveal firms at the tax thresholds accumulating financial assets in the firm.

The second essay looks at how small firms and their investment and production choices respond to a 6 percentage-point reduction in the corporate tax rate over 2012­–2014 in Finland. This corporate tax cut was combined with a dividend tax increase that left the effective shareholder-level tax rate mostly unchanged. Using difference-in-differences method, the researchers do not find statistically significant investment responses in the stock of productive capital after the tax cut. However, they observe an increase in sales and input usage of the treated firms, implying a higher growth rate after the tax cut. Dividing the corporations between two groups based on the ownership type reveals that this positive impact on sales is fully driven by entrepreneurs who actively work and manage their firms.

In the third essay, the researchers study how the HTC reaches the aims of increasing employment in the service sector and curbing tax evasion. They find no increase in the reported value of sales among cleaning firms in Sweden relative to the Finnish firms after the introduction of the current HTC system for cleaning services in Sweden. In their second setting, they do not find any response in sales of renovation services after the increase of maximum credit from 1150 to 3000 euros for the renovation industry in Finland relative to the control group, suggesting negligible demand elasticity with respect to the size of HTC. Finally, a descriptive analysis with the data shows that a relatively large share of individuals claiming HTC make costly mistakes in their reports to the tax authority. This shows as a large excess mass of taxpayers bunching in a “wrong” threshold, without any other reason than their misunderstanding of the claiming system.