This paper provides evidence on the strategic use of owner-controlled firms as a means of tax avoidance under dual personal income taxation. Taxpayers with sufficiently high income levels have incentives to shift income toward corporations, as the combined tax burden of corporate and capital income taxes is lower than that of labor income taxation. We exploit linked micro-data from personal income tax returns and various other sources, leveraging multiple tax reforms in Spain that introduced variation in these incentives across taxpayers and over time. This approach allows us to causally identify the magnitude of income shifting behavior. We find significant tax-motivated responses among business owners, with a semi-elasticity of 0.26 with respect to potential tax savings from incorporating. However, this number varies significantly between types of tax reforms and across tax payers, showing that substantial change of the tax code are more relevant than simple rate changes.

This paper examines how capital gains tax legislation shapes business sales in Germany. Using detailed income tax data on a representative sample of German business owners, the paper documents the characteristics of sellers and analyzes their post-sale behavior. A regression discontinuity design provides evidence of a substantial jump in the number of transactions around a discontinuity in the capital gains tax rate, suggesting that lock-in effects play a significant role. Entrepreneurs with larger capital gains and worse outside options respond particularly strongly to the discontinuity. The results have implications for our understanding of how capital gains tax provisions affect entrepreneurial decisions and broader economic outcomes.

Inheritance and gift taxes may induce liquidity-constrained family-owned businesses to discontinue, as meeting tax liabilities potentially worsens performance. Thus, preferential tax treatment for intra-family transfers is often considered appealing policy. This paper studies the impact of such treatment using a 2004 Finnish reform that sharply reduced gift and inheritance taxes for family business transfers. We construct a repeated cross-section of firms from 1999 to 2010 and classify them as dynastic or non-dynastic based on the presence of the owner’s child on the board prior to succession. We compare trends before and after the reform to assess whether it influenced firms’ decisions to sell, retain ownership within the family, or liquidate. We also examine precautionary behavior prior to succession and key indicators of firm performance. Our estimates show that family succession rises immediately after the reform, with clear anticipatory behavior, but we detect no significant effects on behavioral or financial outcomes.

We assess tax and real economic implications of facilitating the option to incorporate by physicians in Canada, by exploiting the 2006 reform in Ontario which allowed family members to own shares in these businesses. The administrative tax data allows us to trace individual and businesses incomes, both corporate and unincorporated, and taxes for as many as 12 years after the reform. We use a triple-differences design, comparing the outcomes of physicians in Ontario with other high-income professionals and other provinces. The reform stimulated incorporation. Pre-tax personal income and taxes paid (aggregated at the family level) significantly decrease, while their pre-tax business income and corporate taxes substantially increase. The overall income (personal and corporate combined) increases while the average effective tax rate decreases after the reform. Taken together, these results are consistent with both tax avoidance through a corporation and real response via business expansion after incorporation.