Showing papers on "Tax reform published in 1989"

Seigniorage and Political Instability

Abstract: The importance of seigniorage relative to other sources of government revenue differs markedly across countries. This paper tries to explain this regularity by studying a political model of tax reform. The model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and, thus, will rely more heavily on seigniorage. This prediction of the model is tested on cross-sectional data for 79 countries. We find that, after controlling for other variables, political instability is positively associated with seigniorage. (JEL E52, E62, F41)

Using Tax Policy To Curb Speculative Short-Term Trading

Abstract: This article addresses the question of the desirability of a tax on transactions in the securities industry. Many of the other major industrialized economies impose such a tax. In Japan, for instance, the tax raises $12 billion a year (see Roll, 1989). I propose to consider the consequences of a tax at a relatively low rate, say .5 percent to 1 percent of the value of the transactions.1

Optimal Taxation and Optimal Tax Systems

Abstract: The theory of optimal taxation has , for the pas two decades , been the reigning normative approach of taxation. This paper argues that , in its current state, optimal tax theory is incomplete as a guide to action concerning many critical issues in tax policy. It is incomplete because it has not yet come to terms with taxation as a system of coercively collecting revenues from individuals who will tend to resist. The coercive nature of collection taxes implies that the resource cost of implementing a tax system have been and will continue to be a critical determinant of appropriate tax policy. The paper first presents the three cornerstone propositions of optimal tax theory, and then it discusses the influence of these propositions on recent tax policy developments. It concludes by sketching an alternative to optimal taxation, called the theory of optimal tax systems, which embraces the insights of optimal taxation but also considers the technology of raising taxes and the constraints placed upon tax policy by that technology. The optimal tax systems perspective is shown to shed light on the choice of tax instruments, the problem of tax evasion, and the appropriate tax treatment of capital income.

Investment, Financing Decisions, and Tax Policy

Abstract: Studies of tax policy and corporate investment have been prominent in public finance and macroeconomic research. By integrating corporate income tax rates, investment tax credits, and the value of depreciation allowances into the "cost of capital," economists have analyzed the effects of taxes on capital spending. Most studies assume that firms respond to prices set in centralized securities markets, such as market interest rates of Tobin's q, and firms undertake all profitable investment projects. Firms choose the mix or finance among internal funds, debt, and new equity independently; the availability of finance does not limit investment. The implications for tax policy are clear: the marginal tax rate on returns from a new project matters for investment, not the firm's average tax burden on returns from its investments in place. For firms that face imperfect markets for external finance, however, it is no longer sufficient to focus only on the cost of funds determined in centralized securities markets. In particular, if the cost of internal finance differs substantially from external finance for some firms, their investment depends on available cash flow. For these firms, the amount of earnings devoted to taxes - and therefore the average tax rate on returns from existing projects - matters for investment, possibly along with incentive effects of marginal tax rates. We build on recent research that analyzes asymmetric information between firms and suppliers of external capital to examine the link between finance and investment, and, correspondingly, the role played by average as opposed to marginal tax rates in the investment process. Our approach emphasizes firm heterogeneity; some firms can obtain low-cost external funds to respond completely to signals from centralized securities markets, while internal finance constrains the investment of others. In Sections I and II, we consider a q investment model for two types of firms: (i) firms that face essentially no cost disadvantage of external finance, and (ii) firms that must pay a significant premium to raise funds from external sources because of information asymmetries. In both cases, we evaluate the relative influence of average and marginal tax rates on investment. Section III summarizes empirical evidence on the link between internal finance and investment across heterogeneous groups of firms. Section IV concludes and discusses implications for tax policy.

Taxation and the Tiebout Model: The Differential Effects of Head Taxes, Taxes on Land Rents, and Property Taxes

Abstract: on the theory of state and local public finance is the seminal paper by Charles Tiebout (1956) Tiebout constructed a multijurisdictional model in which independent local governments offer a wide variety of expenditure and tax policies, and perfectly mobile consumers reveal their preferences for local public goods through their choice of residential community He argued that, under such circumstances, local public service provision would be efficient The Tiebout model has formed the basis of a vast number of subsequent articles in the state and local public finance literature and has also been very influential in urban and regional economics The efficiency properties of various Tiebout-type models of local public good provision have been examined, and the role of politics in these models has been debated at length in this literature Of more direct relevance to this paper, however, is the fact that although Tiebout had little to say directly about taxation (simply assuming the existence of head taxes), subsequent analyses have used adaptations of this model to examine the effects of local head taxes, land taxes, and property taxes It is the literature on the efficiency and distributional effects of alternative local taxes that is the subject of this survey 1

Strategic Behaviour and the Rules for International Taxation of Capital

Abstract: This paper examines the welfare of a capital exporting or source country and a capital importing or host country under tax credit and tax deduction systems for the international taxation of capital. Because the two tax systems may create quite different strategic incentives for the countries, the authors compare the equilibria in the tax-setting game played by the two countries under each system. They find that the tax credits system introduces an antitrade bias into the equilibrium, contrary to initial impressions, and that both capital exporting and capital importing countries will prefer the tax-deductions scheme to tax credits. Copyright 1989 by Royal Economic Society.

Political Institutions and Tax Policy in the United States, Sweden, and Britain

Abstract: This essay addresses the question, “Why do different democracies pursue different public policies?” through an examination of taxation policy in the United States, Sweden, and Britain. The essay demonstrates how the different decision-making structures found in these three democracies (characterized as pluralist, corporatist, and party government systems, respectively) bias each polity toward different types of policy outcomes. The key argument is that institutional structures are the context in which political actors must necessarily define their policy preferences and determine their strategic objectives. Institutional structures thus provide a central link between individual choice behavior and macro policy outcomes.

The role of tax preparers in tax compliance

Abstract: This paper assesses the influence of tax preparers on tax compliance. Using data from the Internal Revenue Service's (IRS) Taxpayer Compliance Measurement Program and an index of legal ambiguity based on Revenue Rulings, the impact of preparation mode (paid third party vs. self) on compliance at the level of the return line item is probed. The results suggest that preparers contribute to compliance by enforcing legally clear requirements but also contribute to noncompliance, as measured by the IRS, by helping taxpayers take advantage of legal ambiguity. Furthermore, an analysis of a campaign to enforce estimated tax requirements conducted by the Pennsylvania Department of Revenue suggests that tax preparers are also an important network for communicating tax agency enforcement priorities to taxpayers.

Showdown at Gucci Gulch : lawmakers, lobbyists, and the unlikely triumph of tax reform

Abstract: The tax reform act of 1986 was the most sweeping overhaul of the tax code since World War II. Targeted tax breaks worth hundreds of billions of dollars were eliminated in return for lower tax rates, higher standard deductions and larger personal exemptions. The tax bill defied much of the conventional wisdom about how Washington works. It showed that under the right conditions, our government is capable of making radical changes in policy and of favoring the general interest over the special interests. Moreover, it showed that such dramatic changes could occur despite the lack of a clear electoral mandate or of a single-party government. In this paper, we explore the possibility that the conditions leading to the passage of the tax reform act might provide insights into other legislative endeavors. Among the conditions that allowed tax reform to triumph were: the existence of a widelyrecognized public policy problem; a coalition in favor of the legislation that cut across party affiliations and ideologies...

International Trade Effects of Value Added Taxation

Abstract: The actual value added tax systems used in many countries differ significantly from the completely general VAT that has been the focus of most economic analyses. In practice, VAT systems exempt broad classes of consumer goods and services. This has important implications for the effect of the VAT on international trade.A value added tax is sometimes advocated as a way of improving a country's international competitiveness because GATT rules permit the tax to be levied on imports and rebated on exports. This leads to political support for the VAT among exporters and producers of import-competing products. For a general VAT on all consumption, this argument is incorrect except in the very short run because exchange rates or domestic prices adjust to offset the effect of the tax on the relative prices of domestic and foreign goods. When prices or exchange rates have adjusted, a general value added tax will have no effect on imports and exports.In practice, the value added tax frequently exempts housing and many personal services. The VAT thus raises the price of tradeables relative to nontradeables and induces a substitution of housing and services for tradeable goods. Since this implies a reduced consumption of imported goods, it also implies a decline in exports. The most likely effect of the introduction of a VAT would thus be a decline of exports.

Tax Reform and Adjustment Costs: the Impact on Investment and Market Value

Abstract: This paper provides an effective tax rate measure that is valid in the presence of adjustment costs and anticipated tax changes and a measure of the impact of tax changes on market value that may be decomposed into the effects on discounted pure profits and normal returns to capital. Changes in the value of capital may, in turn, be decomposed further into changes in the marginal value of new capital and changes in the relative value of new and existing capital. These new measures are used to evaluate tax changes similar to those introduced by the recent U.S. tax reform. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The Impact of Macroeconomic Policies on the Level of Taxation and the Fiscal Balance in Developing Countries

Abstract: In recent years the taxation level in many developing countries has changed dramatically over relatively short periods. These changes are too large and too sudden to be attributed fully to a deterioration in tax administration or to changes in the traditional determinants of tax levels. They can be attributed, to a considerable extent, to the connection between tax levels and macroeconomic policies--in particular, exchange rate, import substitution, trade liberalization, inflation, public debt, and financial policies. Thus, more attention should be paid to these relationships, and tax reform should aim to neutralize some of their effects.

Dividend Stripping, Risk Exposure, and the Effect of the 1984 Tax Reform Act on the Ex-Dividend Day Behavior

Abstract: This article investigates the importance of risk exposure and the effects of the 1984 Tax Reform Act on the ex-dividend day behavior. The tax reform appears to have inhibited short-term trading activities by increasing the risk exposure of incorporated traders. Moreover, stocks for which existing listed options permitted the reduction of risk through hedged dividend-stripping strategies were affected much less from the new tax code than their nonoptionable counterparts. This implies that risk affects investors' dividend yield choice and that the ex-dividend day behavior may be caused, in part, by the existence of risk premia. Copyright 1989 by the University of Chicago.

Tax Reform and the Market For Tax-Exempt Debt

Abstract: This paper provides clear evidence that the yield spread between long-term taxable and tax-exempt bonds responds to changes in expected individual tax rates, a finding that refutes theories of municipal bond pricing that focus exclusively on commercial banks or other financial intermediaries. The results support the conclusion that in the two decades prior to 1986, the municipal bond market was segmented, with different investor clienteles at short and long maturities. The Tax Reform Act of 1986 is likely to affect this market, however, since it has restricted tax benefits from tax-exempt bond investment by commercial banks. Individual investors are increasingly important suppliers of capital to states and localities, and their tax rates are likely to be the primary determinant of the yield spread between taxable and tax-exempt interest rates in the future.

The Japanese tax system

Abstract: Japan's tax system, which has changed notably through periods of war, post-war reconstruction, rapid economic development, and moderated economic growth, provides outstandingly rich material for in-depth study. In this comprehensive and incisive work, Professor Ishi makes available to English-speaking readers both a detailed description and a perceptive critique of that system. Part I introduces the system in historical and contemporary context and sets out its main features. Part II is devoted to individual income tax - the most important of Japan's taxes - and Part III covers corporate and capital taxation. In Part IV, Professor Ishi provides a detailed analysis of the structure of the indirect tax system in Japan, which proved crucial to tax reform movements in the late 1980s, while Part V discusses the significance of recent tax innovations. This fully revised third edition explores the Japanese government's latest round of tax reforms - a reaction to the country's prolonged period of recession following the collapse of the 'bubble' phenomenon in 1991. Two brand new chapters discuss the effect of environmental taxes and land tax reform, and much of the original data and empirical material has been updated. Professor Ishi's unrivalled experience, including his service on the Tax Advisory Commission (most recently as its Chairman), his activities in scholarly international public finance organizations, and his work in teaching and research, notably in the United States, Italy, and Australia, have enabled him to produce an authoritative and stimulating view of Japan's tax system. His book will be invaluable to all scholars of the theory and practice of taxation.

Tax Evasion and the Black Economy

Abstract: Part 1 Measuring the size of the black economy - monetary approaches: the currency ratio the transactions method currency holdings and the "big bill" phenomenon. Part 2 Monetary statistics and the black economy - some evidence: the black economies of North America and Europe. Part 3 Non-monetary approaches to measuring the black economy: differences between income and expenditure at the household and national levels labour market studies the "soft modelling" approach. Part 4 Participation in the black economy - theory: portfolio models of income tax evasion models of tax evasion with endogenous income some criticisms and developments of the economic model. Part 5 Participation in the black economy - evidence: surveys of the tax-payers' attitudes experimental tax games econometric studies. Part 6 The consequences of tax evasion and the black economy: tax revenue losses macroeconomic issues microeconomic issues. Part 7 Policy issues: tax law enforcement alternative policy options The Keith Report - a case study.

National tax systems versus the European capital market

Abstract: Capital taxation Alberto Giovannini The current structure of taxes on capital income across EC countries can be exploited by corporations to reduce tax burdens. Skilled individuals can indulge in tax avoidance too. The liberalization of capital movements stands to turn tax avoidance into a cottage industry. This article provides a primer on capital income taxes and describes strategies which reduce the tax burden. From a policy perspective, the question is how to avoid massive tax evasion after 1992. There is no need to harmonize if the right taxation principle is adopted. Two principles are contrasted: the territorial principle, according to which taxes are levied on domestic investment irrespective of the country of residence of the beneficiary, and the worldwide principle, according to which taxes are levied on domestic savings irrespective of where they are invested. It is shown that the worldwide principle involves much fewer distortions than the territorial principle. A strict application of this principle would effectively solve the problem of tat evasion in Europe, without requiring full harmonization of the tax systems. Its full implementation would require the abolition of withholding taxes, the elimination of tax deferrals which are quite pervasive throughout Europe, and an in-depth review of blocking and secrecy laws.

A Reexamination of the Value of Tax Options

Abstract: This article reexamines the value of tax trading when the tax rate on long-term realizations is less than that on short-term realizations. In particular, the value of the option to realize long-term capital gains and repurchase stock in order to increase one's tax basis and restart the option to realizefuture losses short term is examined empirically. Our estimate of the incremental value of restarting, which is based on the results of simulations of several alternative tax trading policies over a large number of independent return sequences, is generally much smaller than that reported by Constantinides (1984). The incremental value of restarting is shown to depend critically on the particular pattern of realized returns and the assumed tax treatment of unrealized capital gains at the end of the simulation period. The effects of stockprice volatility, transaction costs, portfolio offset rules, and realization cutoff levels on the value of tax trading are also investigated.

An Economic Analysis of Tax Amnesties

Abstract: Tax amnesties have frequently been justified as politically popular ways to generate increases in government revenue. This paper examines the circumstances under which amnesties are likely to have a beneficial impact on revenue collections. It concludes that, while in general it may be correct to impose a reduced penalty on individuals who voluntarily disclose tax evasion, short-lived amnesties of the type most frequently observed in practice are unlikely to generate significant revenue when judged against the potential danger of reducing future tax compliance.

Capital gains taxation and tax reform

Abstract: sociated with capital gains taxation, how Under a Haig-Simons income tax, cap- these would be affected by a reduction in ital gains would be indexed for inflation capital gains tax rates, and the other poland taxed on accrual, with gains and losses icies available to lessen such distortions treated symmetrically The treatment of gains at death would lose significance because gains would already have been taxed 11 Recent Empirical Evidence as they accrued Many of the distortions associated with the present system of The responsiveness of capital gains recapital gains taxation result from its de- alizations to tax rate changes has been the viation from the Haig-Simons approach subject of spirited debate for over a deThese deviations may have historical ex- cade A review of this literature in Auerplanations but their persistence is hard to bach (1988a) reached several conclusions: rationalize from an economic perspective (1) Previous cross-section studies have, It is therefore disappointing and puzzling by their very nature, been unable

State Tax and Expenditure Limitations: There is No Story

Abstract: Out of the troubled economic atmosphere of the late 1970's grew a discontent with government in general and taxation in particular. The tax revolt took hold at the local level and placed limits on the growth of the property tax through celebrated citizen initiatives like Proposition 13 in California. At the national level, uneasiness with the role of government and a sense that taxation was too high culminated in 1980 with the election of Ronald Reagan. The electorate embraced promises of less government and lower taxes. For states, the tax revolt resulted in a number of state tax and expenditures limitations (TELS). Most had several things in common: they were adopted before 1983, they addressed state appropriations, and they were largely a western phenomenon spreading from California. The overall condition of state economies and structure of state tax systems, in combination with the sensitivity of policymakers to anti-tax sentiment, have done more to limit state spending than have imposed restrictions.

Factors Affecting Saving, Policy Tools, and Tax Reform: A Review

Abstract: This paper reviews the literature on factors which affect saving and capital formation in industrialized countries. Problems of measurement are briefly examined. Evidence of the effect on the rate of saving of real rates of return, income redistribution, allocation of saving between corporations and individuals, growth of public and private pension plans, tax incentives, and many other factors ranging from the bequest motive to energy prices and inflation, is considered. Given this evidence, the limited tools available to policymakers to affect savings are discussed. Finally, the extent to which recent tax reforms in a number of countries appear to have been affected by the desire to increase saving is reviewed.

Effects of the Tax Treatment of Fringe Benefits on Labor Market Segmentation

Abstract: Current federal tax law requires that all workers having the same experience with a firm must receive essentially the same package of fringe benefits in order for those benefits to qualify for preferential tax treatment. The authors argue that this “nondiscriminatory” provision of fringe benefits promotes labor market segmentation by inducing workers to sort themselves across the economy according to their demand for fringe benefits. Several empirical tests using 1968–78 data confirm the existence of sorting and suggest that labor market segmentation increased over time as workers responded to changes in incomes and marginal tax rates.

Efficient Tax Exporting

Abstract: In a multijurisdiction economy with free mobility of households between communities, some portion of any community's tax is incident upon nonresident landowners. It is shown that when the objective of a community is taken to be the level of satisfaction of its residents, a fully efficient allocation is a (Nash) equilibrium of the decentralized game. In general, no local tax structure that restricts a community's tax base to residents can attain the optimum; thus, tax exporting is necessary for independent local government behavior to be consistent with efficiency.

A Regional General Equilibrium-Model of the United-States : Tax Effects on Factor Movements and Regional Production

Abstract: A six-region general equilibrium model of the United States is used to assess the potential long-run effects of state-local and federal tax policies on output and the allocation of factors across regions and sectors. The nonuniform structure of state-local taxes and their interaction with federal taxes means that regional output is affected quite differently than would be projected solely on the basis of changing average regional tax burdens. The study provides a useful indication of conceptual and empirical issues that must be considered in further regional modeling efforts, issues which do not arise in closed-economy national models. Copyright 1989 by MIT Press.