The paper examines the effect of dividend taxation on employment and productivity. I exploit a dividend tax cut of 10 percentage points for closely held private corporations in Sweden. Using data on all closely held Swedish firms with exact information on employees and their wages, I find that firms with limited internal funds increase productivity and wages relative to firms with sufficient internal funds whose investment decisions are less affected by dividend taxes. My findings indicate that dividend taxes constrain firms in investing efficiently. Lower taxes can result in higher capital and labor input and, thus, in higher productivity.

This paper examines the role of personal income taxes (PIT) in corporate investment decisions. Since PIT reduce consumption and increase cost of labor, investment decisions can be affected because of the inevitable link of production input factors. Using data on PIT in 27 European countries and three within-country approaches, we find that personal income taxes substantially reduce investment. The magnitude is comparable to the effect of corporate taxes. We also document that the PIT-investment relationship can be explained by increased labor costs and by reduced consumption due to higher PIT.

This paper examines the effect of tax incentives in the form of bonus depreciation on investment quality. Using the expiration of tax incentives via bonus depreciation in eastern Germany and a representative panel of West German establishments, we show that bonus depreciation significantly lowers investment quality. The average quality of investments, measured by the responsiveness of future revenue and other proxies for cash flow to current investment, reduces by 15.2–23.8% in the short run and 31.8–41.4% in the long run. Our research suggests that this adverse effect of tax subsidies is greater for jurisdictions with higher tax rates, in times of high unemployment, and for large or low-productivity establishments. Overall, while increasing investment quantity, as shown by prior literature, tax incentives such as bonus depreciation substantially reduce the quality of investments.