The opportunity for income shifting between the corporate and personal tax bases is an important aspect of widening income inequality in developed countries. In Canada, where the small business income tax rate is considerably lower than the top individual rate, this activity takes the form of higher income individuals reducing their personal income taxes by
retaining and shifting income via privately owned small businesses. In this paper, I develop a new theoretical framework to show that a lower small business tax rate is not income inequality neutral; the income share of the highest earning small business entrepreneurs, the top 1% and higher, unambiguously increases following a reduction in the small business tax rate. This contributes to a widening income inequality in the economy. Further, because the small business owners benefit from an increasing difference between the small business and top individual tax rates, I also show that they can always ‘buy' a lower corporate tax rate from the government through lobbying as a special interest group. Theoretical predictions are explored on a panel data of Canadian provinces and estimates are consistent with the results; top income shares are
strongly responsive to decreases in the small business tax rate in Canada. This result is robust across various income definitions. I also validate that lobbying has a significant negative influence on small business tax rates across Canadian provinces.

JEL categories: D31, D72, H25, H27, H3, J24, L26