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Income Shifting and the Cost of Incorporation

60 Pages Posted: 24 Jan 2017  

Alisa Tazhitdinova

McMaster University, Department of Economics

Date Written: December 15, 2016

Abstract

Drawing on administrative 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% in some years), a substantial proportion of business owners fails to incorporate. Using a revealed preference approach, I estimate an average cost of incorporation to be greater than £3200. Next, I estimate a proportional hazard model and uncover moderate elasticities 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 the organizational form are modest. At the same time, the large perceived cost of incorporation implies that barriers to entrepreneurship remain large.

Keywords: Incorporation, Organizational Form, Avoidance, Income Shifting, Compliance Cost

JEL Classification: G32, G38, H24, H25, H26, L22

Suggested Citation

Tazhitdinova, Alisa, Income Shifting and the Cost of Incorporation (December 15, 2016). Available at SSRN: https://ssrn.com/abstract=2902834

Alisa Tazhitdinova (Contact Author)

McMaster University, Department of Economics ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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