Economic Effects of Taxing Closed Corporations under a Dual Income Tax

Tobias Lindhe, Jan Södersten () and Ann Öberg ()
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Tobias Lindhe: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Ann Öberg: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

No 2001:16, Working Paper Series from Uppsala University, 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.

Keywords: Dual income taxation; Tax avoidance; Corporate taxation; Cost of capital (search for similar items in EconPapers)
JEL-codes: H24 H25 H32 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2001-09-01
New Economics Papers: this item is included in nep-cdm, nep-cfn, nep-eec, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Ifo Studien , 2002, pages 575-609.

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Working Paper: Economic Effects of Taxing Closed Corporations under a Dual Income Tax (2001)
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