Essays on Taxation and Entrepreneurship

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.