Abstract
Shifting of income between the corporate and the personal income tax bases in response to tax incentives is the premise of the literature on taxation and organizational form. Empirical evidence of income shifting is, however, merely circumstantial. Using a unique panel of high-frequency VAT data from Israel, we trace the footprints of income shifting through incorporation by high-income individuals who convert their labor income into less-taxed dividends. A rise in the personal income tax rates resulted in more than 4500 companies–a 5% addition to the corporate sector–being registered in the 12 months following the tax change, mainly by self-employed professionals in the industries of business activities and health services; behavioral response to taxation was found only in the top percentile of the income distribution.
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