The Corporation As A Tax Shelter: Evidence From Recent Israeli Tax Changes

07/12/2004 |  Romanov Dmitri
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Fiscal Policy

The Corporation As A Tax Shelter: Evidence From Recent Israeli Tax Changes
Dmitri Romanov

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 high-frequency 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.

JEL Classifications: H25; H26; L22.

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