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 Swedish administrative micro data from 2000 to 2011 comprising detailed firm- and individual-level information. We find robust evidence of extensive income shifting across tax bases in response to the 2006 Swedish dividend tax cut. Owner-managers of closely held corporations reclassify earned income as dividend income but do not increase total income. The response is more pronounced for owner-managers with tax incentives and with easier access to income shifting through a high ownership share