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Tax treatment of dividends and capital gains and the dividend decision under dual income tax

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Author Info
Seppo Kari ()
Hanna Karikallio ()

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Abstract

The paper analyses efficiency aspects of a dual income tax system with a higher tax on capital gains than dividends. It argues that apart from the distortions to investments claimed in earlier literature, the system puts even more emphasis in creating incentives for entrepreneurs to participate in tax planning. The paper suggests that the owner of a closely held company can avoid all personal taxes on entrepreneurial income by two tax-planning strategies. The first is the avoidance of distributions, which would be taxed at the tax rate on labour income. These funds would instead be invested in the financial markets. The second strategy is a distribute and call-back policy, converting retained profits into new equity capital. Interestingly, the outcome is that investment in real capital is not distorted in the long-run equilibrium. Empirical evidence using microdata is also provided. Copyright Springer Science+Business Media, LLC 2007

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File URL: http://hdl.handle.net/10.1007/s10797-007-9026-z
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Publisher Info
Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 14 (2007)
Issue (Month): 4 (August)
Pages: 427-456
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:kap:itaxpf:v:14:y:2007:i:4:p:427-456

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Web page: http://www.springerlink.com/link.asp?id=102915

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Related research
Keywords: Dual income tax; Small business taxation; Income shifting; H24; H25;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Journal of Public Economics, Elsevier, vol. 45(3), pages 271-300, August. [Downloadable!] (restricted)
    Other versions:
  2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  3. 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. [Downloadable!]
  4. Tobias Lindhe & Jan Södersten & Ann Öberg, 2004. "Economic Effects of Taxing Different Organizational Forms under the Nordic Dual Income Tax," Asia-Pacific Financial Markets, Springer, vol. 11(4), pages 469-485, August. [Downloadable!] (restricted)
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  5. Roger H. Gordon & Joel Slemrod, 1998. "Are "Real" Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?," NBER Working Papers 6576, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Roger Gordon & Martin Dietz, 2006. "Dividends and Taxes," NBER Working Papers 12292, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Seppo Kari, 1999. "Dynamic Behaviour of the Firm Under Dual Income Taxation," Research Reports 51, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  8. Seppo Kari & Vesa Kanniainen & Jouko Ylä-Liedenpohja, 2007. "Nordic Dual Income Taxation of Entrepreneurs," Discussion Papers 415, Government Institute for Economic Research Finland (VATT). [Downloadable!]
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  9. Alstadsaeter, Annette, 2003. "The Dual Income Tax and Firms' Income Shifting through the Choice of Organizational Form and Real Capital Investments," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  10. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 433-46, August. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ville Mälkönen, 2008. "Optimal Public Procurement Contracts Under a Soft Budget Constraint," Discussion Papers 464, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  2. Marja Riihelä & Risto Sullström & Ilpo Suoniemi, 2008. "Tax Progressivity and Recent Evolution of the Finnish Income Inequality," Discussion Papers 460, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  3. Seppo Kari & Hanna Karikallio & Jukka Pirttilä, 2008. "Anticipating Tax Change: Evidence from the Finnish Corporate Income Tax Reform of 2005," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  4. Elina Berghäll, 2008. "Revealing Agglomeration Economies with Stochastic Frontier Modelling in the Finnish ICT Industry," Discussion Papers 435, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  5. Ossi Korkeamäki & Tomi Kyyrä, 2008. "A Distributional Analysis of Displacement Costs in an Economic Depression and Recovery," Discussion Papers 465, Government Institute for Economic Research Finland (VATT). [Downloadable!]
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