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

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  • Harju, Jarkko
  • Matikka, Tuomas

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.

Suggested Citation

  • Harju, Jarkko & Matikka, Tuomas, 2013. "Entrepreneurs and income-shifting: Empirical evidence from a Finnish tax reform," Working Papers 43, VATT Institute for Economic Research.
  • Handle: RePEc:fer:wpaper:43
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    File URL: https://www.doria.fi/handle/10024/148781
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    References listed on IDEAS

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    13. Kari, Seppo & Karikallio, Hanna & Pirttilä, Jukka, 2009. "The impact of dividend taxation on dividends and investment: New evidence based on a natural experiment," Working Papers 9, VATT Institute for Economic Research.
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    15. Vidar Christiansen & Matti Tuomala, 2008. "On taxing capital income with income shifting," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(4), pages 527-545, August.
    16. Sivadasan, Jagadeesh & Slemrod, Joel, 2008. "Tax law changes, income-shifting and measured wage inequality: Evidence from India," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2199-2224, October.
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    Cited by:

    1. Jarkko Harju & Tuomas Matikka, 2013. "The elasticity of taxable income and income-shifting between tax bases: what is “real” and what is not?," Working Papers 1313, Oxford University Centre for Business Taxation.

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