To Örebro University

This thesis examines the long-term tax incentives for Swedish entrepreneurs, using active owners of closely held corporations as a proxy for entrepreneurship. A general analytical framework is developed by extending the King and Fullerton (1984) model to calculate marginal effective tax rates on capital income (METRs) under detailed income-splitting and ownership rules. The thesis consists of four self-contained essays.

The first essay revisits the taxation of closely held corporations in a dual income tax system. It shows that METRs for active owners are highly sensitive to remuneration strategies, financing choices, firm characteristics, and opportunities for income shifting. Even investments with identical pre-tax returns may face tax wedges that differ by several tens of percentage points, implying substantial distortions.

The second essay documents the evolution of capital income taxation for active owners following the 1991 tax reform. It demonstrates that the tax system remains non-neutral, unstable, and difficult to predict, with large differences in effective taxation across sources of finance, profit levels, and owner incomes. This instability creates uncertainty regarding the future taxation of new investments, especially those financed through new share issues.

The third essay adopts a long-run perspective, constructing annual METRs for entrepreneurial investments from 1862 to 2018. It identifies five distinct tax regimes that help to explain the rise of many successful entrepreneurial firms around 1900, the absence of new large entrepreneurial firms after World War II, and a more recent entrepreneurial renaissance.

The final essay turns to industrial foundations, tracing their tax treatment over the same period. It has been argued that the Swedish tax system has favored firm control through tax-exempt industrial foundations, which should have inhibited entrepreneurship and economic growth. The analysis finds that the combination of tax exemption and mandatory donations to achieve tax exemption can imply required outflows of capital income corresponding to high effective tax burdens.

Taken together, the essays show that tax policy that attempts to combine high and progressive taxation on labor with strong entrepreneurial incentives comes with pronounced trade-offs in terms of neutrality, predictability, and the distribution of incentives across different types of firms.

The institutional literature suggests that long-term tax incentives are crucial for entrepreneurs, but studies on this topic are hampered by problems related to how to define and measure entrepreneurial income. We resolve these problems by drawing on a theoretical definition of the entrepreneur as an owner, which enables us to identify entrepreneurship empirically by means of investments made by active owners of closely held corporations. Using detailed Swedish tax data, we analyze the tax incentives for such owner-entrepreneur investments from 1862 to 2018, thereby highlighting the evolution of a general institutional phenomenon through a long-run, in-depth, country-specific analysis. We calculate the annual marginal effective tax rate (METR) on capital income for investments, distinguishing between average- and top-income entrepreneurs, and between three sources of finance. We identify five tax regimes that indicate substantial differences in institutional quality over time according to the magnitude of the METR and METR differences between average- and top-income entrepreneurs and across sources of finance. Growth-conducive tax incentives shed light on why so many successful entrepreneurial firms were founded in Sweden around 1900, whereas increased taxation helps explain the absence of new large entrepreneurial firms in Sweden after World War II. Improved incentives can be associated with Sweden's recent entrepreneurial renaissance.

It has been argued that the Swedish tax system has favored firm control through industrial foundations, which should have inhibited entrepreneurship and economic growth. However, research has been hampered due to a lack of systematic historical tax data. The purpose of this study is to describe the evolution of tax rules for industrial foundations in Sweden between 1862 and 2018 and to calculate the marginal effective tax rate on capital income (METR). The results show that the METR for an equity financed investment is below 20 percent most of the time and occasionally peak at about 40 percent. Treating the requirement that industrial foundations have to donate the bulk of capital income (less capital gains) to charitable purposes as a tax, the METR seldom is below 50 percent when financing investments with new share issues, and often exceeds 100 percent.

The tax system has at times favoured firm control through private foundations, which has been argued to inhibit high-impact entrepreneurship and economic growth. However, research has been hampered due to a lack of systematic historical tax data. The purpose of this study is threefold. First, we describe the evolution of tax rules for private foundations in Sweden between 1862 and 2018. Second, we calculate the marginal effective tax rate on capital income. Third, we examine the incentives to use private foundations as a means for corporate control by comparing the taxation of private foundations and of high-impact entrepreneurs. Tax incentives help explain why economically significant private foundations were founded between World War I and the 1960s.

The tax system has at times favoured firm control through private foundations, which has been argued to inhibit high-impact entrepreneurship and economic growth. However, research has been hampered due to a lack of systematic historical tax data. The purpose of this study is threefold. First, we describe the evolution of tax rules for private foundations in Sweden between 1862 and 2018. Second, we calculate the marginal effective tax rate on capital income. Third, we examine the incentives to use private foundations as a means for corporate control by comparing the taxation of private foundations and of high-impact entrepreneurs. Tax incentives help explain why economically significant private foundations were founded between World War I and the 1960s.