Essays on taxation – Evidence from tax reforms

Authors: Jarkko Harju

Publication: VATT Publications 64

Date: 27.11.2013


This dissertation consists an introductory chapter and four empirical essays on the taxation of firms and individuals.

The first essay concentrates on how the Finnish tax reform of 2005 affected voluntary pension plan savings in Finland. The main objective is to examine whether or not the coverage and/or the amount of savings in voluntary pension plans changed as their tax treatment changed from progressive labor income taxation to being subject to a flat-rate capital income taxation regime. The results imply that high-income individuals who faced a decrease in their tax incentive to save in these plans reduced their voluntary savings. Savings coverage also decreased in this group but increased among low-income individuals whose incentives to save increased. It also seems that all of the responses were due solely to a change in men's behavior.

The second essay studies tax planning activity among business owners. The study uses a corporate and dividend tax reform in Finland in 2005 as an exogenous source of tax rate variation. The reform increased the marginal tax rate on dividends, thus increasing the incentives for business owners to pay personal compensation in the form of wages rather than dividends. The results support the view that business owners are active in income-shifting. The welfare loss calculations show that the responses have notable consequences for welfare. Also, the size of the change in the tax incentive and the monetary gains from tax optimization seem to affect the behavioral income-shifting response.

The third essay examines the abolition of equalization tax in Finland in 2005. The aim of the equalization tax was to protect domestic tax revenues by ensuring that no dividends could be distributed from profits that were not subject to domestic corporate tax. Equalization tax served this goal by levying an extra corporate-level tax if dividends were financed from tax-exempt (or leniently taxed) profits and MNEs were particularly affected by this tax. We find that MNEs increased their dividend payments after the repeal of the equalization tax. Also, the repatriation of foreign profits in the form of intra-company dividends increased among MNEs. Furthermore, the results imply an increase in the reported profits of foreign subsidiaries of Finnish MNEs, suggesting a decrease in profit-shifting. However, there are no changes in the level of real or financial investments due to the abolishment of EQT.

In the fourth essay we analyze the effects of a reduction in the value-added tax rate for restaurants in Finland on consumer prices, demand for meals and employment. The value-added tax rate was cut from 23% to 13% in July 2010. The results show that the VAT cut reduced restaurant meal prices only a little, by 2% on average. The reduction we found was only a fourth of the full pass-through. The consumer-weighted price response is higher, over half of the full pass-through, implying that larger restaurants reduced their prices more than smaller establishments. There is also substantial heterogeneity in price responses by restaurant type as restaurants that are part of a chain lowered their prices more often than those that do not belong to a chain. The results suggest that the VAT reduction led to no increase in the quantity of restaurant meals supplied and no increase in employment. Also, we do not find that the reform led to any changes in the number of exits from the industry or new businesses being set up.

Main research themes: Social security, taxation and inequality

behavioural responses divident taxation firms households tax policy tax reforms taxation value added tax

ISBN: 978-952-274-097-7 (nid.), 978-952-274-098-4 (PDF)