Essays on Capital Income Taxation in the Corporate and Housing Sectors

Sammanfattning: This thesis consists of an introduction and four self-contained chapters.Chapter I gives a brief introduction to the topic of the thesis and summarizes the main results. Chapter II reports an extensive set of calculations of effective marginal tax rates (EMTR) covering the tax legislation in force in Sweden in 1985, 1991 and 1999. The purpose is to determine how taxation influences the profitability of new investments in the corporate and housing sectors. It is shown that the results agree with the popular view that the old (pre-reform) tax system favored investment in owner-occupied housing at the expense of business investment in real capital. Owner-occupied housing was also much favored relative to other forms of housing investment. Turning to the new 1991 tax system, there is a marked reduction in EMTR for all sectors included in the study. Ignoring owner-occupied housing, it is clear that the difference in the tax treatment between corporate assets and other forms of housing investment were small. Moreover, by 1999 the EMTR had increased again for all sectors. Chapter III tentatively puts effective tax rates to work, by illustrating their use in measuring the efficiency losses of taxation. As in Chapter II, Chapter III examines the tax systems in force in 1985, 1991 and 1999, and the focus of interest is on the (aggregated) corporate and the (aggregated) housing sectors of the economy. It is shown that the tax distortion to resource allocation between these sectors was negligible in 1985, and even though the tax reform of 1991 implied far-reaching changes in the taxation of capital income, the measured efficiency losses did not change between 1985 and 1991. However, limiting the focus to the tax treatment of investments in widely held corporations and owner-occupied housing, it turns out that the efficiency losses decreased as response to the new tax system in 1991. Chapter IV (with Tobias Lindhe and Jan Södersten) analyzes the income splitting rules for closely held corporations (CHC) in the Nordic countries, and determines their impact on the long run cost of capital. We conclude that the Swedish tax rules for CHC offer roughly the same cost of capital as for widely held corporations (WHC) when new investments are financed by retained earnings, while Finnish CHC, in terms of the long run cost of capital, are favored by the tax system compared to WHC. The Norwegian scheme, finally, may or may not cause the cost of capital to be different from that of WHC. Chapter V addresses the question of possible tax discrimination between the self-employed, wage earners and the owners of corporations. The analysis demonstrates that the tax rules for sole proprietorships (SP) in the Nordic countries may or may not offer a possibility for income shifting by switching from being an employee to being a self-employed proprietor. The outcome hinges on the special rule chosen by the tax authorities for splitting business income. Compared to corporate firms (closely and widely held) the SP’s cost of capital is lower, and the reason for that is that the SP avoids the two-tier taxation on the corporate form of organization.