This study empirically investigates how taxes affect managerial compensation for a sample of privately held insurers whose managers own a large percentage of the firm's stock (I refer to these as management‐owned insurers) during 1989–1996. Shareholder/managers receive two types of income from the firm they own: compensation income as employees, and investment income as shareholders. Although compensation income is taxable to employees and deductible by employers, investment income is subject to double taxation. Thus, the mix of the two is an important tax‐planning decision for management‐owned insurers. I predict and find that as individual tax rates increased relative to corporate tax rates from 1989–1992 to 1993–1996, shareholder/managers paid themselves less tax‐deductible compensation relative to a control sample of nonmanagement‐owned insurers (i.e., privately held insurers with no managerial ownership). The study's results expand our understanding of management‐owned, privately held firms' tax‐planning strategies, and have implications for the efficiency of the federal income tax system.

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