Inflexibility in Income Shifting: Implications, Detection and Remedies

Arnt Ove Hopland, Petro Lisowsky, Mohammed Mardan and Dirk Schindler

No 9384, CESifo Working Paper Series from CESifo

Abstract: This study develops theory and discusses implications of inflexibility in tax-motivated income shifting. We show that inflexibility to adjust income-shifting strategies within a tax year in response to losses implies that income-shifting incentives are based on the expected rather than the statutory tax rate differential. This has important implications for empirical research as our finding suggests that using the statutory tax rate differential risks underestimating the tax sensitivity of income shifting. We propose several empirical remedies to mitigate the estimation bias stemming from inflexibility, whenever a direct test is not feasible. The remedies vary in their data requirements, which allows future work on tax sensitivities of income to take into account inflexibility.

Keywords: income shifting; losses; debt shifting; transfer prices (search for similar items in EconPapers)
JEL-codes: F23 H25 H87 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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