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We test whether dividend taxes affect corporate investments. We exploit Sweden’s 2006 dividend tax cut of 10 percentage points for closely held corporations and five percentage points for widely held corporations. Using rich administrative panel data and tripledifference estimators, we find that this dividend tax cut does not affect aggregate investment but that it affects the allocation of corporate investment. Cash-constrained firms increase investment after the dividend tax cut relative to cash-rich firms. Reallocation is stronger among closely held firms that experience a larger tax cut. This result is explained by higher external equity in cashconstrained firms and by higher dividends in cash-rich firms after the tax cut. The heterogeneous investment responses imply that the dividend tax cut raises efficiency by improving allocation of investment.
This paper tests the effect of dividend taxation on employment. Since dividend taxation affects real investments, tax-induced changes in real investments should map into employment effects. Using a difference-in-difference approach around the Swedish 2006 dividend tax cut and unique corporate-level data with income tax information on every employee, we find robust evidence of dividend tax-induced employment effects. In response to the dividend cut, both employment and wage levels increase in cash-constrained firms relative to cash-rich closely held corporations.