Showing papers on "Tax reform published in 1987"

The theory of the firm

Abstract: The purpose of this paper is to present the chronological development ofthe concept of excess burden and the related study of optimal tax theory. A main objective of this exercise is to uncover the interrelationships among various apparently distinct results, so as to bring out the basic structure of the entire problem.The paper includes a discussion of various measures of excess burden,focusing on issues of approximation, informational requirements, aggregation over individuals, and the effects of technology. Included in the presentation of optimal tax theory is a section on tax reform, as well as an application of the theory to the case where uncertainty is present.

On the Excess Burden of Tax Evasion

Abstract: This paper discusses tax evasion. Specifically, the viewpoint that tax evasion benefits society is questioned and proven not to be entirely true. A simple model of tax evasion is presented and it is concluded that: 1) tax evasion is a function of inter alia the marginal tax rate only if the probability of being caught is a function of undeclared income; and 2) that tax evasion introduces uncertainty which causes a utility loss. An example is presented showing that the excess burden of tax evasion and the income tax are sometimes additive. Therefore, ignoring the excess burden of tax evasion will usually lead to underestimation of the total excess burden of a tax.

Household Behavior and the Tax Reform Act of 1986

Abstract: This paper evaluates the effects of the 1986 Tax Reform Act on household labor supply and savings. It describes the tax bill's effects on incentives to work and to save, and uses recent econometric estimates of labor supply and savings elasticities to describe the reform's impact on household behavior. Two factors lead us to conclude that the new law will have small aggregate effects. First, most households experience only small changes in their marginal tax rates. Forty-one percent of the taxpaying population will face marginal tax rates as high, or higher, under the new law as under the previous tax code. Only eleven percent of taxpayers receive marginal tax rate reductions of ten percentage points or more. Second, plausible estimates of both the labor supply and savings elasticities suggest that even for those households that receive rate reductions, behavioral changes will be small. Our analysis suggests that the tax reform will increase labor supply by about one percent, and slightly reduce private savings.

Tax Evasion and Capital Gains Taxation

Abstract: This paper uses time-series data to investigate how changes in capital gains tax rates affect taxpayer compliance. It finds that a one percent increase in the marginal tax rate reduces voluntary compliance by between one half and one percent. These results confirm the findings of previous studies based on individual household data. They also suggest that at least one quarter of the observed capital gain realization response to changes in marginal tax rates is due to changes in reporting behavior, rather than portfolio behavior.

Are we a Nation of Tax Cheaters? New Econometric Evidence on Tax Compliance

Abstract: The theoretical basis for the economic approach to tax compliance has, at least until recently, been inadequate, and the limited empirical work based on it is seriously flawed. In this paper we briefly review both, as well as new theoretical and, especially, empirical work on the tax compliance problem. With respect to the latter we present preliminary results based cm a state-level, time-series, cross-section data set drawn in part from the annual reports of the Commissioner of Internal Revenue.

Chapter 16 Tax incidence

Abstract: Publisher Summary Economics is at its best when it offers important insights that contradict initial, casual impressions. The theory of tax incidence provides a rich assortment of such insights. Tax incidences basic lesson that the real and nominal tax burdens are not necessarily related means that taxes on capital are born by workers, that investment incentives are injurious to capitalists, that taxation of foreigners simply represent indirect domestic taxation, and that generations alive many decades in the future may be supporting those currently alive. The study of tax incidence is both fun, because it offers such surprising findings, and very important, because of its implications about the impacts of government policies. Much of the current tax incidence literature considers the settings of certainty, perfect information, and market clearing. As more sophisticated models relax these assumptions, the theory of tax incidence is enriched and, with all probability, provides even more surprising and exciting economic insights.

Household behavior and the tax reform act of 1986

Abstract: This paper evaluates the effects of the 1986 Tax Reform Act on household labor supply and savings. It describes the tax bill's effects on incentives to work and to save, and uses recent econometric estimates of labor supply and savings elasticities to describe the reform's impact on household behavior. Two factors lead us to conclude that the new law will have small aggregate effects. First, most households experience only small changes in their marginal tax rates. Forty-one percent of the taxpaying population will face marginal tax rates as high, or higher, under the new law as under the previous tax code. Only eleven percent of taxpayers receive marginal tax rate reductions of ten percentage points or more. Second, plausible estimates of both the labor supply and savings elasticities suggest that even for those households that receive rate reductions, behavioral changes will be small. Our analysis suggests that the tax reform will increase labor supply by about one percent, and slightly reduce private savings.

The Effects of Taxation on the Merger Decision

Abstract: This paper presents estimates of the tax benefits generated by a sample of U.S. mergers and acquisitions involving two public corporations over the period 1968-83 and estimates a "marriage model" based on differences between these mergers and another sample of "pseudomergers" that did not occur to determine the impact of these tax benefits on the probability of two firms combining. Our findings reject the hypothesis that leverage played a large role in fostering these transactions, and that the tax losses and credits of acquired firms likewise exerted no impact on merger activity. Though the use of such benefits by acquiring firms to shield profits of other firms did increase the level of activity, the impact was quite small. On the whole, our results suggest that the changes in tax provisions with respect to mergers introduced by the Tax Reform Act of 1986 will have a small impact on U.S. mergers and acquisitions.

Why Have Corporate Tax Revenues Declined

Abstract: This paper examines the source of changes in corporate tax revenues during the last twenty-five years. It finds that legislative changes explain less than half of the revenue decline during this period. Falling corporate profits have had a larger influence on revenue collections than a11 legislative changes taken together, a result that is often obscured in studies focusing solely on the average corporate tax rate. Changes in capital recovery provisions are the most important legislative factor influencing corporate tax revenues, especially in the last five years. The paper also considers the impact of the Tax Reform Act of 1986. The new law will increase the average tax rate on corporate profits by approximately 10 percent. By 1990, the average tax rate will equal its level in the late 1970s, although it will remain substantially below its level in the 1960s and the early 1970s.

The Value-Added Tax: Key to Deficit Reduction

Abstract: Interest in the value-added tax (VAT), a form of sales tax on consumption, will increase as the Gramm-Rudman-Hollings targets for deficit reduction become increasingly difficult to achieve through budget cuts. This monograph describes the implementation and economic effects of the VAT.

Taxation and Output Growth: Evidence from African Countries

Abstract: There is considerable debate over the appropriate role for tax policy in developing economies. In one view, tax hikes reduce deficits and ease budgetary pressures, thereby encouraging long-term growth. An alternative view emphasizes the distortionary effects associated with increased taxation and the positive benefits of a carefully designed tax system. This paper tests these propositions by measuring the impact of government taxation and expenditure on aggregate output growth. A theoretical model is derived which shows that the impact of tax distortions on output growth is usually negative. The theoretical model is tested using a pooled cross-section time-series data set for 31 sub-Saharan African countries during 1965-73 and 1974-82. The regressions imply that the positive benefits of government investment during 1965-73 outweighed the distortionary effects of taxes necessary to finance them. By 1974-82, however, the marginal productivity of government investment had fallen; tax-financed public investment was predicted to have reduced output growth. The empirical results also imply that a revenue neutral shift from the import, corporate, and personal tax to a sales/excise (or consumption) tax will encourage output growth.

City Taxes and Property Tax Bases

Abstract: This paper investigates the simultaneous relationship between tax rates and city property tax bases using data for 86 large U.S. cities in 1967, 1972, 1977, and 1982. We find that a 10 percent increase in the city's property tax rate decreases the city's tax base by about 1.5 percent. In addition, local income taxes and taxes levied by overlying jurisdictions (such as county and state governments) also have negative impacts on the city's property tax base. Local sales taxes, in contrast, appear to have little impact. We conclude that taxes affect local property values more than is typically implied by previous studies that have investigated the impacts of state and local taxes on firms' location decisions.

Fiscal Illusion and "Excessive" Budgets: Some Indirect Evidence:

Abstract: The Leviathan literature has, as one of its themes, the manipulation of tax structures to minimize voter perceptions of their tax shares and hence predicts excessive public budgets. Existing confirmatory tests of this proposition, including those published in this journal, have been indirect and concentrated on the tax side of the budget in isolation. Questionnaire evidence on U.K. fiscal knowledge of both expenditure and taxation suggests no overall bias toward pessimistic or optimistic tax illusions but rather general ignorance.

The Value-Added Tax: Key to Deficit Reduction?

Abstract: Interest in the value-added tax (VAT), a form of sales tax on consumption, will increase as the Gramm-Rudman-Hollings targets for deficit reduction become increasingly difficult to achieve through budget cuts. This monograph describes the implementation and economic effects of the VAT.

The Marriage Tax is Down But Not Out

Abstract: The public debate surrounding the Tax Reform Act of 1986 has paid little attention to the tax consequences of being married. Specifically, there has been virtually no discussion of the possible existence of an implicit "marriage tax"--the increase in the joint income tax liability of a man and woman when they marry. This lack of concern appears to be due to the perception that the new law has lowered marginal tax rates to such an extent that the magnitudes of marriage taxes (and subsidies) are inconsequential. In this paper, I show that to the contrary, the new law created large taxes on being married for some couples, and large subsidies for others. On the basis of a tax simulation model, I estimate that in 1988, 40 percent of all couples will pay an annual average marriage tax of about $1100, and 53 percent will receive an average subsidy of about $600. One striking result that emerges from the analysis is the relatively large marriage tax that will be borne by some low income couples with children. For such couples, the marriage tax can amount to 10 percent of joint gross income. Hence, the new tax law appears to quite "anti-family" for some low income workers.

Tax Reform: Theory and Practice

Abstract: The Tax Reform Act of 1986 is the most significant piece of tax legislation enacted since the income tax was converted to a mass tax during World War II. After decades of erosion, the indi...

Marginal Effective Tax Rates for Capital in the Canadian Mining Industry

Abstract: The authors model a firm that explores, develops, and extracts a depletable asset, taking into account various features of Canadian corporate and Ontario and Quebec mining tax law. They derive the user cost of capital and effective tax rate for investments undertaken by a mining firm. Calculations based on 1985 tax law show that there is considerable dispersion in effective tax rates, most being negative, especially for processing assets. The authors conclude that these taxes have been very poor collectors of mining rents compared to a neutral cash flow tax. Coauthors are Neil Bruce, Ken McKenzie, and Jack Mintz.

A Prolog model of the income tax act of Canada

Abstract: The use of computers in Canadian tax planning has until now been concentrated on numerical analysis. The computer is indeed an excellent tool for calculating tax effects where the legal results of transactions are known. However, I maintain that it can be equally useful as a tool for analysing transactions to determine what those legal results are. The complexities of the Canadian tax system are such that a given transaction could have unintended tax results, where the facts resulting from the transaction fit the words of a rule which may have been designed for, and is perceived as applying to, different circumstances altogether.In this paper I consider the structure and form of the Income Tax Act and show how it is well-designed for computerization. I then review the primary design considerations for a computer-based tax planning system. Finally, I describe the implementation of a partial tax analysis system which I have programmed in Prolog, and review its deficiencies and the extensions which would be required to make it a useful planning tool for tax practitioners.NOTE: this paper is a greatly condensed version of a Master of Laws (LL.M.) thesis, “Blueprint for a Computer-Based Model of the Income Tax Act of Canada”, York University, September 1986. Important detail, references and examples have been omitted due to lack of space. Interested readers are invited to contact the author for a copy of the thesis.

Treasury I and the Tax Reform Act of 1986: The Economics and Politics of Tax Reform

Abstract: During President Reagan's State of the Union Address in January 1984, he requested that Treasury Secretary Donald Regan prepare “a plan for action to simplify the entire tax code so that all taxpayers, big and small, are treated more fairly.” In response, the Department of the Treasury spent ten months preparing a report to the President that has come to be called Treasury I. This three-volume study explained the need for tax reform and the general directions such reform should take, provided a comprehensive set of proposals for reform of the income tax, and analyzed the feasibility and desirability of an American value-added tax. Following almost two years of public debate, the Tax Reform Act of 1986 became law on October 22, 1986. Though widely hailed as the most far-reaching reform of the nation's tax system since the 1940s, the 1986 Act falls far short of the promise of Treasury I. It is useful to devote attention to Treasury I, even though much of it failed to survive the legislative process...

The Tax Reform Act of 1986 and the Cost of Capital

Abstract: T he broad outlines of the recently passed Tax Reform Act of 1986 suggest a shift in the tax burden toward business. Over the five-year period 1987–1991, corporate tax revenues are projected to increase by $120.3 billion with individual tax revenues declining by $121.9 billion. It is natural to conclude that business investment in plant and equipment will be discouraged by this shift. Yet the relationship between tax revenues and investment incentives is a complicated one, particularly when the change in business tax revenues is accompanied by a major change in the tax structure producing these revenues. This paper's primary aim is to discuss the channels through which this major change in the tax structure will affect the incentives for business investment. Among the related questions discussed are the law's impact on the efficiency of capital allocation; corporate debt-equity ratios; corporate mergers and takeovers; tax shelter activity and the nonpayment of taxes by individuals and corporations; the strength of foreign investment in the United States; and the market value of the equity shares of U.S. corporations.

Anticipated Tax Changes and the Timing of Investment

Abstract: This paper analyzes the short-run and long-run effects of corporate tax changes over the last three decades and the likely consequences of proposed future tax changes. Consideration of short-run effects of tax reform on investment and market value requires a careful analysis of three elements of behavior that are normally omitted from long run analyses: the state of investor expectations, the time lags involved in putting new capital in place, and the tax law's distinctions between new and old capital. The model described in this paper considers investment in equipment and investment in plant separately, and does so under different specifications of investor expectations. Our results for the period 1954-1985 suggest that investors did take account of fluctuations in profitability, real interest rates, and the tax code in making their investment plans. We examine the consequences of the nonindexation of depreciation benefits as well as the introduction of the investment tax credit and the Accelerated Cost Recovery System by simulating the corporate sector's performance in the absence of these features. In addition, we analyze the effects of changing the tax code in 1986 along the lines proposed in the Bradley-Gephardt "Fair Tax" plan, the Treasury II plan, and the Rostenkowski plan, H.R. 3838. The simulation results suggest that all three plans would reduce fixed investment in the short run, with the reduction coming primarily in equipment. At the same time, the simulations predict large wind-falls for existing capital assets under all three reform proposals.(This abstract was borrowed from another version of this item.)

The Distribution of Tax Burdens in the American States: the Determinants of Fiscal Incidence

Abstract: G IVEN the coercive nature of taxes and their high salience to voters in state and local elections (Hansen 1983: 178), it is hardly surprising that governments take great pains to justify taxes as fair and equitable. Still, most analyses of state and state-local tax systems start with the assumption that they are generally regressive in their overall incidence pattern (Pechman and Okner 1974; Pechman 1985). But some are more regressive than others. What accounts for this variation?