Tax planning and investment responses to dividend taxation

Aliisa Koivisto

No 154, Working Papers from VATT Institute for Economic Research

Abstract: This study explores how business owners respond to dividend taxes in different margins including tax planning and investment. I use administrative tax data on all privately held Finnish corporations and their main owners in 2006–2016. By using tax schedule discontinuities and changes in the schedule as variation, I find exceptionally clear dividend payment responses to tax rates. Evidence on the asset composition of firms indicates that a notable part of the payment response is due to inter-temporal income-smoothing, while changes in the tax schedule did not cause significant real responses in output or investment. Hence, dividend taxes capitalize into share values, as earnings are left in the firms to avoid higher dividend tax. In addition, studying the income composition of owners around tax changes reveals income-shifting between wage and dividends with negligible effect on gross income received from the firm.

Keywords: dividend taxation; investment; income-shifting; bunching; Business taxation and regulation; G38; H21; H24; H25; fi=Verotus|sv=Beskattning|en=Taxation| (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cfn and nep-pbe
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