Entrepreneurs and income-shifting: Empirical evidence from a Finnish tax reform

Jarkko Harju and Tuomas Matikka

No 43, Working Papers from VATT Institute for Economic Research

Abstract: This study examines the extent of direct tax avoidance through income-shifting between wages and dividends, and approximates the deadweight loss due to this behavior for the owners of privately held corporations. The dual income tax system in Finland offers noticeable incentives for income-shifting. The extensive dividend tax reform of 2005 enables us to study how this particular form of tax avoidance reacts to an exogenous change in tax rates. Our results support highly active income-shifting, and the apparent tax avoidance behavior has considerable welfare effects. We also find evidence that costs related to income-shifting behavior affect the effectiveness of taxation.

Keywords: Tax avoidance, income shifting, entrepreneurs, dual income tax, Taxation and Social Transfers, Julkisen talouden rahoitus ja tulonsiirrot, H210 - Taxation and Subsidies: Efficiency; Optimal Taxation, H250 - Business Taxes and Subsidies including sales and value-added (VAT), H320 - Fiscal Policies and Behavior of Economic Agents: Firm, (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-acc, nep-iue, nep-pbe and nep-pub
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Citations: View citations in EconPapers (2)

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