Alisa Tazhitdinova, McMaster University

Income Shifting and the Cost of Incorporation
Friday, 9 March 2018 - 2:30 pm to 4:00 pm
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Adam Lavecchia
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Free of charge
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Drawing on administrative panel data covering the full population of self-employed individuals in the UK, I study the extent of income shifting from personal to corporate tax bases through incorporation. Despite large tax savings to incorporation (exceeding 10 pp in some years), a substantial proportion of business owners fails to incorporate. Using a revealed preference approach, I estimate an average yearly cost of incorporation to be greater than £3,750. Next, I estimate a proportional hazard model and uncover moderate elasticities (0.15-0.23) of hazard rate of incorporation with respect to tax savings. These findings imply that income shifting through incorporation is not the primary avoidance channel for the self-employed and that distortions to the choice of organizational form are moderate. At the same time, the large perceived cost of incorporation implies that barriers to entrepreneurship remain large.