Linked Nordic administrative records indicate that personal holding companies can defer high-income owners’ taxes for long periods and materially change measured progressivity.
Research question
How does the use of personal holding companies vary across the income distribution, and what does it imply for effective taxation and measured inequality?
Method & data
Twenty years of Swedish and Norwegian administrative microdata link firms to owners; event studies use shocks to operating firms’ value added.
Main finding
The abstract reports that holding companies retain a substantial share of top owners’ income and shield dividend distributions from individual taxation, producing much lower effective rates at the top.
Why it matters
Tax-base design and the timing of realization can change both the progressivity of a tax system and cross-country inequality comparisons.
What to verify
The public abstract focuses on Sweden and Norway and does not state how closely the estimates map to countries with different anti-avoidance rules.
Show public abstract used for this summary
Tax avoidance through personal holding companies has long been viewed as a key challenge for progressive income taxation. We exploit twenty years of administrative micro-data linking firms to owners in Sweden and Norway to analyze how the use of personal holding companies varies across the income distribution and to quantify its implications in a quasi-experimental setting. About half of the income of the top 0.1% is retained in personal holding companies defined, as in US tax law, as firms for which five or fewer owners own more than 50% of the stock and that derive more than 60% of income from investment income. Event studies of shocks to operational firms’ value-added show that holding companies shield around half of dividend distributions from individual income taxation. Profits tend to remain in holding companies for long periods of time, with cumulative payout rates of 15%–20% over two decades for the highest income groups. Wealth taxes do not provide an effective backstop due to the low valuation (or exemption) of shares in private businesses. As a result, effective tax rates, all taxes included, fall from about 50% for the upper middle class to about 15%–20% among the highest-net-worth individuals. Accounting for income in holding companies erases half of the difference in the 1980–2020 rise of the top 1% fiscal income share between Nordic countries and the United States, where rules penalizing the use of holding companies have been in place since the 1930s.