Sweden’s dual income tax (DIT) system, introduced through the 1990–1991 tax reform, relies on income-splitting rules for active owners of closely held corporations to limit income shifting. This article quantifies how the tax system has shaped investment incentives and tax neutrality since the reform. Using an extended King–Fullerton framework, we construct annual marginal effective tax rate (METR) series for a marginal investment, distinguishing financing through new equity, retained earnings, and debt, and allowing for different rates of return and owner income positions.
The results show substantial non-neutrality and pronounced time variation, especially for new equity. Debt is typically tax-favored, while new equity can be favored over retained earnings at low returns but becomes less favorable at higher returns as more surplus is taxed as labor income. Inflation materially affects long-run comparisons and short-run fluctuations. The analysis is relevant for other DIT countries designing anti-shifting regimes for owner-managed firms.
