MANAGING EMPLOYEE COMPENSATION TO SHIFT INCOME BETWEEN CORPORATE AND SHAREHOLDER TAX BASES: EVIDENCE FROM PRIVATELY-HELD PROPERTY-LIABILITY INSURANCE COMPANIES

This study investigates whether privately-held property and liability insurance companies manage employee compensation to shift income between the firm and shareholder-employees to minimize taxes. It predicts that, when shareholder-employees' marginal tax rates are lower than the corporate marginal tax rate, privately-held insurers shift corporate earnings to shareholder-employees using tax-deductible compensation; when shareholder-employees' marginal tax rates exceed the corporate marginal tax rate, privately-held insurers reduce the amount of corporate earnings shifted to shareholder-employees. The multivariate regression results on a sample of employee-owned and nonemployee-owned privately-held insurers during 1989–96 are consistent with the predictions. The results have important implications for assessing the efficiency of income tax changes and the economic performance of privately-held firms.