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Corporate Responses to Size-Based Tax Rates in Lithuania
World Bank
2023.07.06
This paper studies how firms respond to differential, size-based tax rates using administrative tax data in Lithuania. Exploiting a notch in the tax schedule faced by corporations, it documents strong behavioral responses to tax incentives― revenue elasticity is estimated at 0.35 and cost elasticity at ?1.3, implying a large total profit elasticity of 7.4. It then leverages the panel structure of the data to provide insights on the dynamic effects of these tax incentives. Firms located close to but below the notch report systematically lower revenue growth in the short term, but the effects dissipate over time.