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We use newly linked tax records to show that the large responses of UK company owner-managers to personal taxes are due to intertemporal income shifting and not to reductions in real business activity. Around half of this shifting is short-term and helps prevent volatile incomes being taxed more heavily under progressive personal taxes. The remainder reflects systemic profit retention over long periods to take advantage of lower tax rates, including preferential treatment of capital gains. We find no evidence that this tax-induced retention increases business investment. It does, however, substantially reduce the tax revenue raised from high income business owners.
Authors


Research Fellow London School of Economics
Kate is an IFS Research Fellow and an Assistant Professor at LSE, interested in public finance, industrial organisation and applied microeconomics.

Thomas Pope
Working Paper details
- DOI
- 10.1920/wp.ifs.2021.4921
- Publisher
- Institute for Fiscal Studies
Suggested citation
H, Miller and T, Pope and K, Smith. (2021). Intertemporal income shifting and the taxation of business owner-managers. London: Institute for Fiscal Studies. Available at: https://ifs.org.uk/publications/intertemporal-income-shifting-and-taxation-business-owner-managers (accessed: 10 February 2025).
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