Are Closely-Held Firms Tax Shelters?

36 Pages Posted: 9 Nov 2013 Last revised: 7 Oct 2014

See all articles by Annette Alstadsæter

Annette Alstadsæter

School of Economics and Business, NMBU

Wojciech Kopczuk

Columbia University - Graduate School of Arts and Sciences - Department of Economics; Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Kjetil Telle

Statistics Norway - Research Department

Date Written: November 2013

Abstract

In 2004 Norwegian authorities announced a reform introducing dividend taxation for personal (but not corporate) owners to take effect starting in 2006. This change provided incentives to maximize dividends in 2004 and 2005, and to retain earnings in the following years. Using Norwegian registry data that cover the universe of non-publicly traded firms, we find that dividend payments responded very strongly to the anticipated reform, but also that much of the response was compensated by re-injecting shareholder equity in the same firms. On the other hand, following the reform firms began to retain earnings. While all categories of assets grow, the increase in durable assets categories that include equipment, machinery, company cars, planes and boats, is particularly striking. We find that personally owned firms and those that pursued aggressive dividend maximization policy in anticipation of the reform exhibit lower profits and economic activity in its aftermath, but retain earnings and accumulated assets at comparable or faster rate than others. The differential effect on assets is concentrated in financial (a potential substitute for private saving) and durable (a potential substitute for private consumption) asset categories.We interpret these results as indicating both the existence of real tax responses and supportive of the notion that in the presence of dividend taxation closely-held firms partially serve as tax shelters.

Suggested Citation

Alstadsaeter, Annette and Kopczuk, Wojciech and Telle, Kjetil, Are Closely-Held Firms Tax Shelters? (November 2013). NBER Working Paper No. w19609, Available at SSRN: https://ssrn.com/abstract=2352126

Annette Alstadsaeter (Contact Author)

School of Economics and Business, NMBU ( email )

P.O. Box 5003
NO-1432 Aas
Norway

HOME PAGE: http://www.nmbu.no/emp/annette.alstadsater

Wojciech Kopczuk

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Columbia University - School of International & Public Affairs (SIPA)

420 West 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kjetil Telle

Statistics Norway - Research Department ( email )

Kongens Gt. 6
PO Box 8131 Dep
N-0033 Oslo
Norway

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