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Economic Effects of Taxing Closed Corporations under a Dual Income Tax

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Author Info

  • Lindhe, Tobias

    (Department of Economics)

  • Södersten, Jan

    ()
    (Department of Economics)

  • Öberg, Ann

    ()
    (Department of Economics)

Abstract

Under the Nordic dual income tax system, the taxpayer's total tax bill depends not only on his total income but also on the division of that income between capital income and labor income. This has created new room for tax avoidance, especially for active owners of (closed) corporations. For that reason the Nordic governments have enacted special income-splitting rules and this paper examines the economic effects of these rules. The Swedish scheme of taxing closed corporations is shown to be neutral in its impact on the allocation of resources between closely and widely held corporations, and the cost of capital is invariant to the rate at which capital income is imputed to the owner. The Finnish system rather increases the attractiveness of investing in closed corporations, while the Norwegian scheme may or may not cause the cost of capital to be different from that of widely held corporations. Finally, for Swedish tax rules, we show that the owner's labor supply may decrease as a response to a more lenient tax treatment.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2001:16.

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Length: 38 pages
Date of creation: 01 Sep 2001
Date of revision:
Publication status: Published in Ifo Studien , 2002, pages 575-609.
Handle: RePEc:hhs:uunewp:2001_016

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Dual income taxation; Tax avoidance; Corporate taxation; Cost of capital;

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References

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  1. Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "Taxing Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-1.
  2. Roger H. Gordon & Jeffrey K. MacKie--Mason, 1994. "Tax Distortions to the Choice of Organizational Form," Public Economics 9401004, EconWPA, revised 18 Jan 1994.
  3. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Munich Reprints in Economics 19842, University of Munich, Department of Economics.
  4. Erik Fjaerli & Diderik Lund, 2001. "The choice between owner's wages and dividends under the dual income tax," Finnish Economic Papers, Finnish Economic Association, vol. 14(2), pages 104-119, Autumn.
  5. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
  6. Robert J. Barro & Paul M. Romer, 1991. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr91-1.
    • Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1.
  7. Seppo Kari, 1999. "Dynamic Behaviour of the Firm Under Dual Income Taxation," Research Reports 51, Government Institute for Economic Research Finland (VATT).
  8. Roger H. Gordon & Jeffrey K. MacKie-Mason & R. Glenn Hubbard, 1995. "The Importance of Income Shifting to the Design and Analysis of Tax Policy," NBER Chapters, in: Taxing Multinational Corporations, pages 29-38 National Bureau of Economic Research, Inc.
  9. Mervyn A. King & Don Fullerton, 1984. "West Germany," NBER Chapters, in: The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany, pages 149-192 National Bureau of Economic Research, Inc.
  10. Peter Sørensen, 1994. "From the global income tax to the dual income tax: Recent tax reforms in the Nordic countries," International Tax and Public Finance, Springer, vol. 1(1), pages 57-79, February.
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Cited by:
  1. Seppo Kari & Ylä-Liedenpohja & Jouko, 2005. "Cost of Capital for Cross-border Investment: The Fallacy of Estonia as a Tax Haven," Discussion Papers 367, Government Institute for Economic Research Finland (VATT).
  2. Peter Birch Sørensen, 2003. "Neutral Taxation of Shareholder Income: A Norwegian Tax Reform Proposal," CESifo Working Paper Series 1036, CESifo Group Munich.
  3. Jukka Pirttilä & Håkan Selin, 2006. "How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993," CESifo Working Paper Series 1875, CESifo Group Munich.
  4. Seppo Kari & Hanna Karikallio, 2007. "Tax treatment of dividends and capital gains and the dividend decision under dual income tax," International Tax and Public Finance, Springer, vol. 14(4), pages 427-456, August.
  5. Seppo Kari & Vesa Kanniainen & Jouko Ylä-Liedenpohja, 2007. "Nordic Dual Income Taxation of Entrepreneurs," Discussion Papers 415, Government Institute for Economic Research Finland (VATT).

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