nach oben

International Tax and Public Finance

16.04.2024

Tax planning and investment responses to dividend taxation

verfasst von: Aliisa Koivisto

Erschienen in: International Tax and Public Finance

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

This study explores empirically how business owners respond to dividend taxes in a range of different margins including tax planning and investment. Using administrative tax data on all privately held Finnish corporations, I find exceptionally clear dividend payment responses to tax rate discontinuities and changes. Studying the income composition of owners around tax changes reveals clear income shifting between wage and dividends with negligible effect on gross income received from the firm. Evidence on the asset composition of firms indicates that a notable part of the payment response is due to inter-temporal income-smoothing, while I observe no statistically significant real responses in output or investment. Heterogeneity analysis suggests that more experienced owners and owners with lower income have higher tax base elasticities.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

E.g. Acemoglu (2009)

Studies on income shifting: Harju and Matikka (2016); Pirttilä and Selin (2011); Alstadsæter and Jacob (2016), studies on inter-temporal income-smoothing: Le Maire and Schjerning (2013) and on investment: Yagan (2015); Alstadsæter et al. (2017).

For example, the marginal tax rate on dividends (including corporate taxes) jumped from 28 to 40.5% at 90,000 EUR between 2006 and 2011.

E.g. Blomquist and Selin (2010), Bargain and Peichl (2016) and Jacquet and Lehmann (2020).

Literature showing income shifting between tax bases in other countries includes Tazhitdinova (2020); López-Laborda et al. (2018); Alstadsæter and Jacob (2016) and Waseem (2018).

Auerbach (1979).

For example, Zodrow (1991) describes the capitalization mechanism in more detail.

Dividends signal the true value of the firm, and retaining earnings leaves more cash under the control of managerial choices, and thereby disincentivizes the close monitoring of managers, potentially leading to unproductive investments using retained earnings.

Dividends from publicly traded firms face a different dividend tax scheme.

The Finnish dividend tax system varies depending on the organizational form of the company. In this study, I focus on privately held corporations that are limited companies owned by a single person or a group of individuals. The privately held corporation is the most common corporate form in Finland, covering nearly half of all firms.

For example in 2008 the highest earned income tax rate kicked in at 62,000 EUR.

0.26 + (1\(-\) 0.26)*0.7*0.3. Above the monetary threshold the capital tax rate has been applied to 85% of excess dividends since 2014, and before 2014 to 70%.

It is usually optimal to pay wages until the marginal tax reaches the level of the dividend tax. The optimal low amount of wage depends on the particular year and municipality (more detail in the Appendix) as well as the amount of dividend, but the tax rate was always lower for wages than for dividends for wage income of below 20,000–25,000 EUR at the time.

Table 15 in the Appendix describes the pooled data covering all years in the panel.

The owner can postpone redeeming dividends from the firm. Thus, the dividend tax is paid according to the tax rate of the year when the dividend is redeemed, not based on the year of distribution of dividend. Therefore, some of the owners have several dividend observations for the same company and year. By way of a solution, dividend observations for an owner-company pair in a single year have been aggregated.

Kleven (2016) provides a review of the method and its indications.

Kleven (2016) provides a good introduction to bunching and how frictions and tax planning limit the use of the bunching elasticity as a structural parameter to estimate the effects of policies.

The exact limit used is 666,666.667 EUR.

Owners who were already paying capital income dividends above 90,000 EUR and thus had net assets in the firm higher than 1 M EUR did not face a change in the marginal tax rate but only in the average tax rate.

Hence the data are a balanced panel based on the 2011 net asset position.

Owners with a net asset share above 1,875,000 EUR already faced the higher capital income tax bracket, so they were likely only to face a change in their average dividend tax rate and not in the marginal tax rate.

See more in Appendix A.1.

For firms of this size, it is common that the owner also works in the firm.

However, more than 60% of the treated firms did pay dividends between 60,000 and 90,000 EUR (Table 5).

Furthermore, potential losses may further reduce the tax on capital gains at the firm level.

Shown in Fig. 14 in the Appendix.

For example, Zodrow (1991) describes the capitalization mechanism in more detail and Yagan (2015) shows empirical evidence of a dividend payout windfall following a dividend tax cut in the US, supporting this theory.

The set-up only studies local effects of changes in the current marginal tax rate, so I cannot rule out global effects caused by changes in average tax rates or indirect effects, e.g. through the future tax burden.

The data include information on firm-owner pairs starting in 1998, and the main dataset I use starts only in 2006, allowing me to split the data by the median years as owner of the particular firm.

16.255 (0.475), 16.138 (0.496) and 15.624 (0.437) for the 9% threshold and 14.384 (0.942), 14.489 (0.790) and 13.988 (0.623) for the 8% threshold.

Employer’s social contributions (työnantajan sairausvakuutusmaksu, työeläkevakuutusmaksu, työttömyysvakuutusmaksu, ryhmähenkivakuutusmaksu) and employee’s social contributions (työeläkevakuutusmaksu, työttömyysvakuutusmaksu, vakuutetun sairausvakuutusmaksu).

This so-called YEL system, where the entrepreneur sets the labor income level, applies to all self-employed persons who are taxed according to the self employed person’s pension act, implying business owners who, alone or together with family members, own at least 50% of their firm or hold a leading position in the firm and own over 30% of the company’s shares. These are the majority of the owners studied in this essay.

Kleven (2016) provides a review of the method and its indications.

A threshold in the dividend tax schedule creates a kink point in the budget set of received income net of taxes with different amounts of gross dividends.

Acemoglu, D. (2009). Introduction to modern economic growth. Princeton University Press.

Alstadsæter, A., Jacob, M., & Michaely, R. (2017). Do dividend taxes affect corporate investment? Journal of Public Economics, 151, 74–83. https://doi.org/10.1016/j.jpubeco.2015.05.001CrossRef

Alstadsæter, A., & Jacob, M. (2016). Dividend taxes and income shifting. The Scandinavian Journal of Economics, 118(4), 693–717. https://doi.org/10.1111/sjoe.12148CrossRef

Auerbach, A. J. (1979). Wealth maximization and the cost of capital. Quarterly Journal of Economics, 93, 433–446.CrossRef

Bargain, O., & Peichl, A. (2016). Own-wage labor supply elasticities: Variation across time and estimation methods. IZA Journal of Labor Economics. https://doi.org/10.1186/s40172-016-0050-zCrossRef

Bastani, S., & Selin, H. (2014). Bunching and non-bunching at kink points of the Swedish tax schedule. Journal of Public Economics, 109, 36–49. https://doi.org/10.1016/j.jpubeco.2013.09.010CrossRef

Blomquist, S., & Selin, H. (2010). Hourly wage rate and taxable labor income responsiveness to changes in marginal tax rates. Journal of Public Economics, 94(11), 878–889. https://doi.org/10.1016/j.jpubeco.2010.08.001CrossRef

Chetty, R., Friedman, J. N., Olsen, T., & Pistaferri, L. (2011). Adjustment costs, firm responses, and micro vs. macro labor supply elasticities: Evidence from Danish tax records. Quarterly Journal of Economics, 126(2), 749–804. https://doi.org/10.1093/qje/qjr013CrossRef

Chetty, R., & Saez, E. (2005). Dividend taxes and corporate behavior: Evidence from the 2003 dividend tax cut. The Quarterly Journal of Economics, 120(3), 791–833. https://doi.org/10.1093/qje/120.3.791CrossRef

Chetty, R., & Saez, E. (2010). Dividend and corporate taxation in an agency model of the firm. American Economic Journal: Economic Policy, 2(3), 1–31. https://doi.org/10.1257/pol.2.3.1CrossRef

Government proposal 185. (2013). Hallituksen esitys 185/2013. Retrieved fromhttps://www.finlex.fi/fi/esitykset/he/2013/20130185

Government proposal 50. (2011). Hallituksen esitys 50/2011. Retrieved from http://www.finlex.fi/fi/esitykset/he/2011/20110050

Gruber, J., & Saez, E. (2002). The elasticity of taxable income: Evidence and implications. Journal of Public Economics, 84(1), 1–32.CrossRef

Harju, J., Koivisto, A., & Matikka, T. (2022). The effects of corporate taxes on small firms. Journal of Public Economics, 212, 104704. https://doi.org/10.1016/j.jpubeco.2022.104704CrossRef

Harju, J., & Matikka, T. (2016). The elasticity of taxable income and income-shifting: What is “real” and what is not? International Tax and Public Finance. https://doi.org/10.1007/s10797-016-9393-4CrossRef

Jacquet, L., & Lehmann, E. (2020). Optimal income taxation with composition effects. Journal of the European Economic Association, 19(2), 1299–1341. https://doi.org/10.1093/jeea/jvaa022CrossRef

Kari, S., & Laitila, J. (2015). Nonlinear dividend tax and the dynamics of the firm. FinanzArchiv / Public Finance Analysis, 71(2), 153–177.CrossRef

King, M. A. (1974). Taxation and the cost of capital. The Review of Economic Studies, 41(1), 21–35. https://doi.org/10.2307/2296396CrossRef

Kleven, H. J. (2016). Bunching. The Annual Review of Economics. https://doi.org/10.1146/annurev-economics-080315-015234CrossRef

Korinek, A., & Stiglitz, J. E. (2009). Dividend taxation and intertemporal tax arbitrage. Journal of Public Economics, 93(1), 142–159. https://doi.org/10.1016/j.jpubeco.2008.08.001CrossRef

Kreiner, C. T., Leth-Petersen, S., & Skov, P. E. (2014). Year-end tax planning of top management: Evidence from high-frequency payroll data. American Economic Review, 104(5), 154–58. https://doi.org/10.1257/aer.104.5.154CrossRef

Kreiner, C. T., Leth-Petersen, S., & Skov, P. E. (2016). Tax reforms and intertemporal shifting of wage income: Evidence from Danish monthly payroll records. American Economic Journal: Economic Policy, 8(3), 233–57. https://doi.org/10.1257/pol.20140233CrossRef

Le Maire, D., & Schjerning, B. (2013). Tax bunching, income shifting and self-employment. Journal of Public Economics, 107(1), 1–18. https://doi.org/10.1016/j.jpubeco.2013.08.002CrossRef

Lindhe, T., Södersten, J., & Öberg, A. (2004). Economic effects of taxing different organizational forms under the Nordic dual income tax. International Tax and Public Finance, 11, 469–485. https://doi.org/10.1023/B:ITAX.0000033988.12886.5eCrossRef

López-Laborda, J., Vallés-Giménez, J., & Zárate-Marco, A. (2018). Income shifting in the Spanish dual income tax*. Fiscal Studies, 39(1), 95–120. https://doi.org/10.1111/j.1475-5890.2017.12147CrossRef

Miller, H., Pope, T., & Smith, K. (2022). Intertemporal income shifting and the taxation of business owner–managers. The Review of Economics and Statistics. https://doi.org/10.1162/rest_a_01166CrossRef

Mortenson, J. A., & Whitten, A. (2020). Bunching to maximize tax credits: Evidence from kinks in the US tax schedule. American Economic Journal: Economic Policy, 12(3), 402–32. https://doi.org/10.1257/pol.20180054CrossRef

Pirttilä, J., & Selin, H. (2011). Income shifting within a dual income tax system: Evidence from the Finnish tax reform of 1993*. Scandinavian Journal of Economics, 113(1), 120–144. https://doi.org/10.1111/j.1467-9442.2010.01635.xCrossRef

Poterba, J.M., & Summers, L.H. (1985). The economic effects of dividend taxation. In Recent Advances in Corporate Finance, edited by Edward Altman and Marti Subrahmanyam, pp. 377–380.

Saez, E. (2010). Do taxpayers bunch at kink points? American Economic Journal: Economic Policy, 2(3), 180–212. https://doi.org/10.1257/pol.2.3.180CrossRef

Sinn, H.-W. (1991). The vanishing Harberger triangle. Journal of Public Economics, 45(3), 271–300. https://doi.org/10.1016/0047-2727(91)90029-2CrossRef

Søgaard, J. E. (2019). Labor supply and optimization frictions: Evidence from the Danish student labor market. Journal of Public Economics, 173, 125–138. https://doi.org/10.1016/j.jpubeco.2019.03.003CrossRef

Tazhitdinova, A. (2020). Are changes of organizational form costly? Income shifting and business entry responses to taxes. Journal of Public Economics, 186, 104187. https://doi.org/10.1016/j.jpubeco.2020.104187CrossRef

Waseem, M. (2018). Taxes, informality and income shifting: Evidence from a recent Pakistani tax reform. Journal of Public Economics, 157, 41–77. https://doi.org/10.1016/j.jpubeco.2017.11.003CrossRef

Yagan, D. (2015). Capital tax reform and the real economy: The effects of the 2003 dividend tax cut. American Economic Review, 105(12), 3531–63. https://doi.org/10.1257/aer.20130098CrossRef

Zodrow, G. R. (1991). On the ‘traditional’ and ‘new’ views of dividend taxation. National Tax Journal, 44(4), 497–509.CrossRef

Titel: Tax planning and investment responses to dividend taxation
verfasst von: Aliisa Koivisto
Publikationsdatum: 16.04.2024
Verlag: Springer US
Erschienen in: International Tax and Public Finance
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-024-09837-w