Dividend taxes and income shifting

This paper analyzes whether a dividend tax cut for owner–managers of closely held corporations encourages income shifting, income generation, or both. We use rich, micro data from Sweden for the period 2000–2011 comprising the entire Swedish population, as well as firmand individual-level data for all owner–managers in closely held corporations, partnerships, and self-employed. We find robust evidence of extensive income shifting across tax bases in response to the 2006 dividend tax cut. Relative to owners of unincorporated businesses, owner–managers of closely held corporations do not increase total income. Instead, they relabel earned income as dividend income. The income shifting effect is stronger for owner–managers with tax incentives and with easier access to income shifting through a high ownership share.