Cutting taxes affecting firms is commonly seen as a way of increasing growth and the level of investment. In a new SNS report, however, economists Jarkko Harju, Aliisa Koivisto and Tuomas Matikka argue that this strategy is not a given, as they see no clear evidence that reduced corporate taxes result in small corporations investing more.
Small firms and especially start-ups play an important role with regard to growth and economic development. This is one of the reasons why many countries, including Sweden, have reduced their corporate taxes in recent years. However, only a limited amount of research on these kinds of reforms focuses on the impact on start-ups and growing firms.
The report Do Corporate Tax Cuts Boost Small Firms? discusses the impact of tax reforms carried out in Finland during the period 2012–2014. The focus is on the impact of these reforms on the rate of investment and economic performance of small firms and start-ups. The researchers do not observe any significant changes for these firms in terms of their rate of investment.
“Our results indicate that cutting corporate taxes is not a particularly effective tool if you want small firms to invest more in their own operations,” says Aliisa Koivisto, researcher at UNU-WIDER in Helsinki, Finland.
Furthermore, previous research also shows insignificant effects on investments when reducing the tax on dividends. All in all, this indicates that more targeted investment subsidies would be more effective in terms of increasing firm investments.
In addition, there are also purely redistributive effects. When taxes affecting firms are reduced, this tends to favor high-income earners more than individuals with lower incomes. The increasing economic disparities arising as a result must be considered in light of the possible benefits of such reforms.
“This may be something that politicians need to take into account. We need a holistic perspective regarding possible socio-economic effects when reforming the tax system,” says Jarkko Harju, professor at Tampere University, Finland and researcher at the VATT Institute for Economic Research in Helsinki, Finland.
ABOUT THE REPORT
Do Corporate Tax Cuts Boost Small Firms? is published within the framework of the SNS research project Taxes in a Globalised World. The report discusses a study based on administrative data covering all firms in Finland and their principal owners. In the analysis, partnership firms, which were not affected by the corporate tax reform, are used as a control group for corporations. The level of detail in the data enables the researchers to compare corporations with partnership firms that are similar in size and operate in similar markets and similar industries. The study design enables the researchers to examine the causal effects of tax cuts.
ABOUT THE AUTHORS
Jarkko Harju is a professor at Tampere University, Finland and a researcher at the VATT Institute for Economic Research in Helsinki, Finland.
Aliisa Koivisto is a researcher at UNU-WIDER in Helsinki, Finland.
Tuomas Matikka is a researcher at the VATT Institute for Economic Research in Helsinki, Finland.