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THE IMPACT OF FISCAL POLICY ON PROFITS

Authors

  • MARGARITA KATSIMI,

    1. Katsimi: Assistant Professor, Department of International and European Economic Studies, Athens University of Economics and Business, Athens 10434, Greece. Phone +30-210-8203179, Fax +30-210-8214122, E-mail mkatsimi@aueb.gr
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  • VASSILIS SARANTIDES

    1. Sarantides: PhD Candidate, Department of International and European Economic Studies, Athens University of Economics and Business, Athens 10434, Greece. Phone +30-210-8203354, Fax +30-210-8214122, E-mail sarantides@aueb.gr
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    • Without implicating, we wish to thank Sarantis Kalyvitis, Thomas Moutos, and seminar participants at the Athens University of Economics and Business for useful suggestions. The comments and advice of two anonymous referees and the co-editor have improved both the presentation and the substance of the paper.


Abstract

This paper investigates the impact of fiscal policy on profits using panel data for 18 high-income OECD countries during the period 1975–1999. We estimate a profit equation allowing a consistent treatment of the government budget constraint, and we try to disentangle the effects of different spending and taxation items. As far as public spending is concerned, our results strongly suggest that capital expenditures are associated with higher profits, while expenditures on goods and services and in particular on wages and salaries deteriorate profits. In general, “productive” expenditures seem to increase profits while the effect of “unproductive” expenditures is insignificant. Transport and communication expenditures seem to have a positive impact on profits. On the revenue side, we find that both direct and indirect taxation has a negative impact on profits. (JEL E62, H32, H54)

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