No. 35: Dividend taxes, employment, and firm productivity

Abstract

The paper examines the effect of dividend taxation on employment and productivity. I exploit a dividend tax cut of 10 percentage points in Sweden for closely held private corporations. Using data on all Swedish closely held firms, with exact information on employees and their wages, I find that, consistent with theory, cash-constrained firms increase productivity by 3% and wages by 2% relative to unconstrained firms whose investment decisions are unaffected by dividend taxes. My findings indicate that dividend taxes constrain firms in investing efficiently. Higher taxes can result in lower capital and labor input and, thus, in substantially lower productivity.