Income Mobility of Owners of Small Businesses when Boundaries between Occupations are Vague



categorized as wage earners. With the split model, owners of small businesses could incorporate as a
widely held firm, with an ownership share of less than two-thirds. These active owners are classified
as employees, but could still take advantage of the gap between capital and wage income taxation by
being paid in terms of dividends instead of salary. Thoresen and Alstadsæter (2008) find that some of
the features of the dual income tax work in combination with some of the features of human capital
intensive businesses to facilitate organizational shifts, providing substantial income gains for the
people involved. The evidence presented here substantiates some of the implications of these shifts
with regard to the overall economic advancement of business owners.

Small business ownership can take one of three organizational forms: the owner can be
denominated as self-employed (or sole proprietor); ownership can take the form of the closely held
firm under the split model; or, finally, as the widely held firm. Business owners who incorporate as
one of the two latter options are classified as wage earners, even though their activities are very similar
to those of the self-employed. Under these circumstances, allowing the self-employed to represent
owners of small businesses when discussing the effects of business ownership on income growth, we
are in danger of seriously misleading our audience.

In exploring such definitional challenges, the paper shows that owners of small businesses
do in fact operate under various organizational forms, and that different tax systems can affect the
significance of this definitional problem. To identify owners of small businesses characterized as
widely held firms, we compare data retrieved from the newly established Register of Shareholders
with data from the End of the Year Certificate Register.3 This allows us to discuss the relationship
between income gain and business ownership for different definitions of business owner, applying a
wide definition that incorporates owners whose businesses are classified as widely held firms.

Previous contributions on mobility of business owners, see e.g., Holtz-Eakin et al. (2000),
Fairlie (2004; 2005), note that running a business creates an opportunity for upward mobility for
disadvantaged groups. Given the emphasis of the present study on business owners involved in tax
avoiding organizational shifts and ownership of small businesses as a means of getting rich and
staying rich, our focus is on the effect on the upper part of the income distribution. Of course, we
could have used cross-sectional data to examine relationships, identifying the number of business
owners in the upper part of the income distribution in repeated cross-sections over the period.
However, by adopting a longitudinal perspective we get a better understanding the relationship
between business ownership and income over time. The main approach of the present paper is to
discuss income mobility by estimating transition rates, using various definitions of income hierarchy
movement as the dependent variable and focusing on business ownership as an explanatory variable,

3 See Statistics Norway (2006b) and Statistics Norway (2006c) for documentation of the two registers, respectively.



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