Tax planning and investment responses to dividend taxation

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. Heterogeneity analysis suggests that more experienced owners and owners with lower income have higher tax base elasticities. 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 changes in the tax schedule did not cause significant real responses in output or investment.