Special corporate income tax rate for micro-enterprises in Lithuania: productive or unproductive incentive?
ENThe main purpose of this study is to examine in more detail the impact of the special corporate income tax (CIT) rate on the behavior of micro-enterprises in Lithuania. In doing so the study looks at the special CIT rate from the perspective of incentives that shape enterprise’s economic choices. It adopts an institutional entrepreneurship model in which the special CIT rate is an independent variable that creates incentives for enterprises to accumulate higher profits and therefore influences their profitability, a dependent variable. Theoretically, this influence can manifest itself through three channels. First, the special CIT rate can affect factor costs. It can directly reduce the cost of investment or working capital by reducing the cost of financing an enterprise’s activities from internal sources, which in turn would increase returns through higher productivity or greater scale. Second, the special CIT rate may provide incentives to replace part of the wage bill with less taxable dividends for interest holders employed in the enterprise or pay employees undeclared wage supplements. And third, the special CIT rate, by introducing the differentiation in corporate income taxation, may encourage economic actors to opt for non-market transactions motivated by incentives of paying lower CIT. The study analyses each of these three potential sources of profit accumulation separately. The study employed administrative firm-level data, which enabled to perform an analysis according to the CIT rate actually applied to enterprises. For the purposes of the analysis, three populations of Lithuanian enterprises have been singled out – enterprises to which a 0%, 5% and 15% CIT rate was actually applied in the period of 2014-2018. The total size of all three populations analysed was 488.234 cases. The study compares all three populations of enterprises according to profitability, investment, current asset and liability, wage, and other indicators.The results of the study confirm the hypothesis that the special CIT rate, as an institutional incentive, influences the behaviour of enterprises by increasing their motivation to accumulate profits. Enterprises subject to the special CIT rate are systematically more profitable than enterprises subject to the standard CIT rate. The study found that the special CIT rate, while providing additional incentives for enterprises to accumulate profits, does not act as a productive incentive that, as initially expected by the government, would motivate greater profit accumulation through corporate development. On the contrary, more evidence has been found that the special CIT rate is more likely to act as an incentive for enterprises to obtain higher returns from unproductive, lower tax-motivated sources, such as non-market transactions between formally or informally related economic actors or reductions in labour costs through the channel of less taxed profits. Based on the results of the study, a policy recommendation is formulated to abandon the special CIT rate and move to more differentiated small business policy instruments, which would allow to focus support measures on enterprises motivated to invest and grow, and reduce the opportunities for enterprises without such motivation to use state tax support as a source of unproductive returns.
