Who Participates in Income Shifting?

This paper analyzes the sources of heterogeneity in tax-minimizing strategies across individuals. We summarize insights obtained from the literature into three conditions affecting participation in tax minimization: namely, incentive, access, and awareness. Using a rich Swedish administrative panel data set on corporations, individuals, and active owners of closely held corporations, we analyze the sources of heterogeneity in participation in observable income shifting at the time of the 2006 Swedish tax reform. This reform increased both the incentive and opportunities to shift income from labor to the capital income tax base for the owner–managers of corporations. We find that both tax incentives and awareness matter for the decision to access income-shifting opportunities and participation in income shifting itself. We also find that the after-tax income of individuals participating in income shifting increased following the change in the income composition.