​​Are Changes of Organizational Form Costly? Income Shifting and Business Entry Responses to Taxes

Published in ​Journal of Public Economics, 2020, volume 186 (June), 104187

Drawing on administrative panel data covering the full population of business owners in the UK, we study the effects of differential tax liabilities across organizational forms on business entry and on income shifting. We find that a 10% increase in savings from incorporation leads to a 1.7% increase in the number of new business owners. However, higher entrepreneurial entry is offset by income shifting – increasing the hazard rate of incorporation of the existing self-employed by up to 2.3% for a 10% increase in tax savings. We show that despite large tax savings from incorporation (exceeding 10 pp in some years), a substantial proportion of business owners fail to incorporate, suggesting that income shifting through incorporation is not the primary avoidance channel for the self-employed.