Income splitting among the self-employed

Abstract

Under individual taxation with progressive marginal tax rates, households in which the distribution of income is unequal benefit from attributing income to the lower income household member. Self-employment provides greater potential to 'split'income in this way because of the absence of a third party reporting income. Using the Canadian experience as a case study, this paper develops a unique estimator of the incidence of illegal income splitting among self-employed couples. The results suggest that the incidence of income splitting among self-employed men in Canada is non-trivial; but no evidence is found that self-employed women attribute income to their spouses. © 2006 The Canadian Economics Association.