Business creation, income sheltering and individual tax planning: evidence from special tax regimes for small businesses in Chile

Abstract

In 2013, the Chilean tax system was characterized by the presence of several special tax regimes for small businesses (STRs). Given system’s complexity, the particularities of the different STRs raised concerns about their potential usage as tax avoidance channels for high income taxpayers. This paper addresses that issue by asking if those regimes were associated with a strategic tax planning decision at the individual level. Descriptive statistics account for three stylized facts about STRs usage who suggest the existence of a strategic behavior: STRs were massively used, were mainly used by high income taxpayers, and usage made by high income taxpayers appeared to be part of a businesses portfolio. After rationalizing the stylized facts with a simple analytic model, an econometric analysis is carried out in order to provide formal evidence about strategic behaviors regarding STRs usage. Results confirm model’s predictions: after a reform that made a special STR more restrictive, incomes from businesses subscribed to that STR reported at the individual level decreased, and income from alternative sources increased, resulting in higher taxable incomes given the more restrictive scenario for avoiding taxes. According to the model presented, evidence support the existence of strategic behaviors regarding tax planning at the individual level.