THE CORPORATION AS A TAX SHELTER: EVIDENCE FROM RECENT ISRAELI TAX CHANGES

Dmitri Romanov ()
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Dmitri Romanov: Bank of Israel

No 2004.17, Bank of Israel Working Papers from Bank of Israel

Abstract: Shifting of income between the corporate and the personal income tax bases in response to tax incentives is the premise of the literature on taxation and organizational form. Empirical evidence of income shifting is, however, merely circumstantial. Using a unique panel of highfrequency VAT data from Israel, we trace the footprints of income-shifting through incorporation by high-income individuals who convert their labor income into less-taxed dividends. A rise in the personal income tax rates resulted in more than 2,200 corporations being registered, mainly by self-employed professionals, specialists and doctors for whom tax avoidance through incorporation was feasible and, apparently, preferable to tax evasion.

Keywords: Income shifting; Organizational form; Tax avoidance (search for similar items in EconPapers)
JEL-codes: H25 H26 L22 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-12
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