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International Tax and Public Finance

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31.07.2018

Using small businesses for individual tax planning: evidence from special tax regimes in Chile

verfasst von: Claudio A. Agostini, Eduardo Engel, Andrea Repetto, Damián Vergara

Erschienen in: International Tax and Public Finance | Ausgabe 6/2018

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Abstract

Many countries have special tax regimes (STRs) for small businesses. Even though these regimes may reduce compliance costs, they increase the complexity of the tax system and can be used by high-income individuals to avoid taxes. This paper uses administrative data from Chile to analyze whether the use of STRs is associated with strategic tax planning at the individual level. A descriptive analysis of the data finds three stylized facts that, taken together, are consistent with strategic behavior: STRs are used frequently, they are used mainly by high-income taxpayers, and high-income taxpayers are more likely to hold a portfolio of businesses filing taxes under STRs. We rationalize these facts with a simple model of small business creation and tax planning and test the model’s predictions. We find that following a reform that made a particular STR more restrictive, reported individual incomes from businesses filing under that STR decreased between 10 and 15%, while income reported from alternative sources increased. Overall Taxable Income increased between 4 and 7%. This increase is explained by the more restrictive scenario for avoiding taxes through STRs, consistent with individuals using these regimes for tax planning.

Vorheriger Artikel Inclusive fiscal reform: ensuring fairness and transparency in the international tax system

Nächster Artikel Tax refunds and income manipulation: evidence from the EITC

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Even though these stylized facts could reflect the fact that high-income individuals are richer precisely because they have better entrepreneurial abilities and thus create more successful businesses, the analysis below suggests that there may be significant use of STRs for tax avoidance purposes. More important, these stylized facts clearly contradict the goal of STRs as a special provision for low-income owners of small businesses.

This depends on the global complexity of the tax system. For instance, Engelschalk (2004) argues that in transition economies, the existence of STRs has created room for tax evasion and tax avoidance behaviors through the creation of small businesses.

For a survey of individuals’ behavioral responses to tax policy, see Saez et al. (2012).

These sums, and the eligibility criteria that follow, are applied separately for the agricultural, mining and transport sectors.

Annual income under 12,600 USD is exempt. Nearly 80% of individual taxpayers were exempt in 2013.

Summing up, Taxable Income is equal to total income minus non-distributed profits. That is, Taxable Income equals the sum of dependent and Independent Labor Income dividends, Withdrawals realized capital gains and presumed PT Income. According to Chilean tax law, all dividends and Withdrawals are paid from before-tax business income.

Dependent workers who do not have income other than wages and salaries do not have to file the F22 tax form, as all their taxes due have been withheld by their employers. Nevertheless, this form is mandatory for individuals perceiving income from firms. On average, 69.8% of all individual taxpayers are exempt from filing this form.

Unfortunately, we do not have access to business ownership shares data for years other than 2013. This prevents us from using the broader data used in stylized facts’ section in the difference-in-differences estimations below.

Individuals in the highest four tax brackets face marginal income tax rates above the corporate tax rate.

Table 15 of Appendix B extends this analysis by showing fractions of taxpayers holding shares of 1 to over 15 firms by income group.

Table 16 of Appendix B shows detailed data for Panel A, while Table 17 of Appendix B shows detailed data for Panel B.

As Table 16 of‘Appendix B shows, the number of businesses in the same regime a taxpayer may own can reach surprisingly high levels. For example, some taxpayers at the top 0.1% own 41 14B businesses, 19 14T businesses or 22 PT businesses.

This is reasonable if both regimes apply to different economic sectors (as discussed in Sect. 2 for the Chilean case) and ignores economies of scope for businesses that benefit from different regimes.

Taxes are filed at the individual level in Chile, that is, there is no joint filing with spouses or other family members.

The ideal is to use Withdrawals from businesses subscribed to different regimes separately. Yet, as mentioned in Sect. 3, only data on aggregate Withdrawals from these regimes are available.

\(\alpha \) accounts for the level of confidence, i.e., it defines the tails of the distributions. We follow Imbens and Rubin (2015) and use \(\alpha =0.05\).

See Imbens and Wooldridge (2008) and Imbens and Rubin (2015).

For simplicity we assume \(\tau _m\) differentiable at all points and ignore the possibility of discontinuities.

The cost function c is closely related to a cost of tax avoidance considered in Slemrod and Yitzhaki (2002) and Slemrod (2001) that is increasing and convex in the amount of taxes sheltered.

If \(\tau _m'>0\), the value is always unique; otherwise, there may be a continuum of values.

If many values of \(Y^*_s\) and S satisfy the conditions that follow, choose the largest one.

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Titel: Using small businesses for individual tax planning: evidence from special tax regimes in Chile
verfasst von: Claudio A. Agostini
Eduardo Engel
Andrea Repetto
Damián Vergara
Publikationsdatum: 31.07.2018
Verlag: Springer US
Erschienen in: International Tax and Public Finance / Ausgabe 6/2018
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-018-9509-0

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