Abstract
Current debates on the gift and inheritance tax are often ideological, and empirical evidence on the effects of this tax on the strategic decision-making of owners of privately owned companies is scarce. To better understand the economic and societal consequences of gift and inheritance taxes, this white paper uses population data on private companies in Sweden to examine how privately owned companies were affected by the abolition of the gift and inheritance tax in 2004/2005. We applied a matching technique to compare privately-owned companies led by owner-managers who have potential next-generation successors in their family (treated group) to childless owner-managers without potential next-generation successors (control group), thereby drawing on a sample of approximately 37,000 companies. We found that the abolition of the tax increased net sales, profitability, fixed and current assets, and productivity of private firms. The tax abolition thus appears to have incentivized and enabled stronger growth and earnings power for private firms that had the prospect of being handed over to the next generation. The increased earnings power of these firms thereby appears to be enabled by the abolished need for companies to extract capital through dividends to pay future gift and inheritance taxes, as we found that the tax abolition resulted in increased liquidity and shareholders’ equity, while reducing leverage. Our study also points to long-term benefits to society from these increases in earnings power as we found that the reform resulted in higher corporate income taxes paid among firms with potential successors. The abolition of the gift and inheritance tax thus incurred a strengthening of recurring tax revenues from these firms. Beyond corporate tax revenues, our findings further show that firms with potential successors expanded their total salary expenditures following the reform—pointing to broader labor market benefits in payroll tax revenues and social contributions. Overall, we conclude that the abolition of the gift and inheritance tax in Sweden encouraged and enabled firms with potential next generation owners to adopt a long-term horizon, be growth-oriented, and to create transgenerational value, which in turn benefitted society by increasing recurring corporate tax revenues and employee salaries—suggesting the reform’s positive consequences extended beyond the firms themselves.