Shifts in Organizational Form under a Dual Income Tax System

There is scant evidence of business owners engaging in tax-motivated shifts in organizational form. The main reason is the lack of micro data for tracking the movement of taxpayers across organizational modes. By utilizing rich Norwegian micro data on individuals, firms, and firms' owners in the period 1993-2003, we are able to follow a panel of existing businesses and their owners over time and evaluate the effect of a shift in a firm's organizational form on the owner's personal income. We find that the interaction between business characteristics and features of the dual income tax system motivate organizational shifts that result in substantial income gains for the owners.