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Are changes of organizational form costly? Income shifting and business entry responses to taxes

Alisa Tazhitdinova

Journal of Public Economics, 2020, vol. 186, issue C

Abstract: Drawing on administrative panel data covering the full population of business owners in the UK, I study the effects of differential tax liabilities across organizational forms on business entry and on income shifting. I find that a 10% increase in savings from incorporation leads to a 1.7% increase in the number of new business owners. However, higher entrepreneurial entry is offset by income shifting – increasing the hazard rate of incorporation of the existing self-employed by up to 2.3% for a 10% increase in tax savings. I show that despite large tax savings from incorporation (exceeding 10 pp. in some years), a substantial proportion of business owners fail to incorporate, suggesting that income shifting through incorporation is not the primary avoidance channel for the self-employed.

Keywords: Entrepreneurial entry; Incorporation; Organizational form; Avoidance; Income shifting; Compliance cost (search for similar items in EconPapers)
JEL-codes: G32 G38 H24 H25 H26 L22 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jpubeco.2020.104187

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