Showing papers on "Tax reform published in 2011"

What Fiscal Policy Is Effective at Zero Interest Rates

Abstract: Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; and 2) tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes. The results are specific to an environment in which the interest rate is close to zero, as observed in large parts of the world today.

The Case for a Progressive Tax: From Basic Research to Policy Recommendations

Abstract: This paper presents the case for tax progressivity based on recent results in optimal tax theory. We consider the optimal progressivity of earnings taxation and whether capital income should be taxed. We critically discuss the academic research on these topics and when and how the results can be used for policy recommendations. We argue that a result from basic research is relevant for policy only if (a) it is based on economic mechanisms that are empirically relevant and first order to the problem, (b) it is reasonably robust to changes in the modeling assumptions, (c) the policy prescription is implementable (i.e., is socially acceptable and is not too complex). We obtain three policy recommendations from basic research that satisfy these criteria reasonably well. First, very high earners should be subject to high and rising marginal tax rates on earnings. Second, low income families should be encouraged to work with earnings subsidies, which should then be phased-out with high implicit marginal tax rates. Third, capital income should be taxed. We explain why the famous zero marginal tax rate result for the top earner in the Mirrlees model and the zero capital income tax rate results of Chamley-Judd and Atkinson-Stiglitz are not policy relevant in our view.

Tax Policy for Economic Recovery and Growth

Abstract: This article identifies tax policy that both speeds recovery from the current economic crisis and contributes to long-run growth. This is a challenge because short-term recovery requires increases in demand while long-term growth requires increases in supply. As short-term tax concessions can be hard to reverse, this implies that policies to alleviate the crisis could compromise long-run growth. The analysis makes use of recent evidence on the impact of tax structure on economic growth to identify which growth-enhancing tax changes can also aid recovery, taking account of the need to protect those on low incomes.

The Structure and Reform of Direct Taxation

Abstract: Part One: Introduction 1. Scope and Purpose of the Study 2. The Characteristics of a Good Tax Structure 3. The Tax Base Part Two: Defects of the Present System 4. The Existing Base for Direct Taxes in the United Kingdom 5. The Direct Tax Burden and its Distribution 6. Indexation for Inflation Part Three: Some Radical Restructurings of the System of Direct Taxes 7. A Comprehensive Income Tax 8. Forms of Expenditure Tax 9. A Universal Expenditure Tax 10. A Two-Tier Expenditure Tax 11. Housing 12. Corporation Tax 13. Social Security and Income Maintenance 14. The Rate Structure 15. Capital Taxes I: Taxes on the Transfer of Wealth 16. Capital Taxes II: An Annual Wealth Tax 17. National Insurance Contributions, Payroll Taxes, Investment Income Surcharge, Earned Income Relief and Capital Taxes 18. The Tax Unit 19. Trusts

Do IRS Audits Deter Corporate Tax Avoidance

Abstract: We extend research on the determinants of corporate tax avoidance to include the role of Internal Revenue Service (IRS) monitoring. Our evidence from large samples implies that U.S. public firms undertake less aggressive tax positions when tax enforcement is stricter. Reflecting its first-order economic impact on firms, our coefficient estimates imply that raising the probability of an IRS audit from 19 percent (the 25th percentile in our data) to 37 percent (the 75th percentile) increases their cash effective tax rates, on average, by nearly 2 percentage points, which amounts to a 7 percent increase in cash effective tax rates. These results are robust to controlling for firm size and time, which determine our primary proxy for IRS enforcement, in different ways; specifying several alternative dependent and test variables; and confronting potential endogeneity with instrumental variables and panel data estimations, among other techniques.

Tax Competition: A Literature Review

Abstract: This article reviews the social science literature on tax competition in three steps. The first step is to look at the baseline model of tax competition on which most of the literature implicitly or explicitly builds. The key feature is that governments in a context of open borders will engage in wasteful competition for mobile economic assets and activities through tax reductions. The second step is to focus more closely on tax-induced cross-border mobility. Do tax payers actually shift assets and activities across borders in response to differences in taxation? The main message of the literature is that the scope for tax arbitrage depends crucially on the legal rules governing the taxation of cross-border activities and that the intensity of tax arbitrage varies greatly across different taxes. The final step is to analyze government reactions to tax arbitrage. Do they engage in competitive tax cutting as predicted by the baseline model? The literature discusses various strategies of tax competition and demonstrates that different governments use them to different degrees across different taxes. It also shows, however, that governments increasingly engage in tax cooperation to reign in tax arbitrage and competition. While off to a slow start in the 1960s, tax cooperation has gained momentum in recent years, especially after the financial crisis in 2008.

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Abstract: This study investigates the spread of aggressive corporate tax reporting by modeling a firm’s decision to adopt the corporate-owned life insurance (COLI) shelter. Prior studies identify firm characteristics associated with aggressive tax reporting (Desai and Dharmapala 2006; Frank et al. 2009) and tax shelter participation (Wilson 2009; Lisowsky 2010). This study examines whether social environment factors explain the pattern of tax shelter adoption. Building on theory related to the diffusion of innovations and institutional isomorphism, I hypothesize direct and indirect ties between prior and potential shelter adopters influence the spread of shelter use. I find that network ties via board interlocks increase the likelihood of adopting the COLI shelter. I also find weak evidence that COLI use spreads geographically. However, I find no evidence that the spread of COLI use is concentrated among a particular set of audit firms or industries.

The Surprising Power of Age-Dependent Taxes

Abstract: This paper provides a new, empirically driven application of the dynamic Mirrleesian framework by studying a feasible and potentially powerful tax reform: age-dependent labour income taxation. I show analytically how age dependence improves policy on both the intratemporal and intertemporal margins. I use detailed numerical simulations, calibrated with data from the U.S. Panel Study of Income Dynamics, to generate robust policy implications: age dependence (1) lowers marginal taxes on average and especially on high-income young workers and (2) lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted. Finally, I calculate and characterize the welfare gains from age dependence. Despite its simplicity, age dependence generates a welfare gain equal to between 0∙6% and 1∙5% of aggregate annual consumption, and it captures more than 60% of the gain from reform to the dynamic optimal policy. The gains are due to substantial increases in both efficiency and equity. When age dependence is restricted to be Pareto improving, the welfare gain is nearly as large.

Capital Structure Choice and Company Taxation: A Meta-Study

Abstract: This paper provides a quantitative review of the empirical literature on the tax impact on corporate debt financing. Synthesizing the evidence from 46 previous studies, we find that this impact is substantial. In particular, the tax rate proxy determines the outcome of primary analyses. Measures like the simulated marginal tax rate (Graham (1996a) avoid a downward bias in estimates for the debt response to tax. Moreover, debt characteristics, econometric specifications, and the set of control-variables affect tax effects. Accounting for misspecification biases by means of meta-regressions, we predict a marginal tax effect on the debt ratio of 0.3.

Do Auditor-Provided Tax Services Improve the Estimate of Tax Reserves?*

Abstract: CRISTI A. GLEASON, University of IowaLILLIAN F. MILLS, University of Texas at Austin1. IntroductionWe investigate whether auditor-provided tax services (ATS) improve the estimate of taxreserves. ATS could provide auditors with superior knowledge that would improve thequality of the audited financial reports, or they could impair auditor independence.

The Incentives for Tax Planning

Abstract: We use a proprietary data set with detailed executive compensation information to examine the relationship between the incentives of the tax director and GAAP and cash effective tax rates, the book-tax gap, and measures of tax aggressiveness. We find that the incentive compensation of the tax director exhibits a strong negative relationship with the GAAP effective tax rate, but little relationship with the other tax attributes. We interpret these results as indicating that tax directors are provided with incentives to reduce the level of tax expense reported in the financial statements.

What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks*

Abstract: We reassess the driving forces behind the recent decline of corporate tax rates in Europe. Using data for up to 32 countries from 1983 to 2006, we analyze the roles of economic and financial openness as well as tax competition, while allowing for dynamic adjustment to shocks and period-specific and country-specific effects. While there is no evidence that countries that have become more open have reduced their tax rates more, our findings suggest that countries strongly compete over statutory tax rates. A simulation of tax rates in a scenario with no cross-sectional dependence in tax setting suggests that, in the absence of tax competition, the mean statutory tax rate of Western European countries in 2006 would have been about 12.5 percentage points above its actual level. We conclude that the recent downward trend in corporate taxes is mainly a result of tax competition.

Aid and tax revenue: Signs of a positive effect since the 1980s

Abstract: This paper addresses the effect of aid loans and grants on tax effort using data for 82 developing countries over 1970–2005. We find no robust evidence for a negative effect of aid (grants or loans) on the tax/GDP ratio, other than a contemporaneous correlation, but find some evidence that the effect of grants on tax revenue is positive (if significant) since the mid 1980s and that grants tend to increase tax revenue over the medium term. For poor aid recipients, grants are to be preferred to loans because they create no debt and have no adverse fiscal effects.

Dividends, Share Repurchases, and Tax Clienteles: Evidence from the 2003 Reductions in Shareholder Taxes

Abstract: This study jointly evaluates firm-level changes in investor composition and shareholder distributions following a 2003 reduction in the dividend and capital gains tax rates for individuals. We find that directors and officers, but not other individual investors, rebalanced their portfolios to maximize after-tax returns in light of the new tax rules. We also find that firms adjusted their distribution policy (specifically, dividends versus share repurchases) in a manner consistent with the altered tax incentives for individual investors. To our knowledge, this is the first study to employ simultaneous equations to estimate both shareholder and managerial responses to the 2003 rate reductions. We find that the generalized method of moments (GMM) estimates are substantially stronger than OLS estimates, consistent with our expectation that investor and manager responses are simultaneously determined. Failure to estimate systems of equations may account for some of the weak and conflicting results fr...

Axe the Tax: Taxes Are Disliked More than Equivalent Costs

Abstract: Tax collection is critical for the proper functioning of society. However, many people strongly dislike paying taxes. Although this distaste could be rational on economic grounds, the authors show that this attitude extends beyond simply disliking the costs incurred and affects behavior in counternormative ways. They demonstrate the phenomenon of tax aversion: a desire to avoid taxes per se that exceeds the rational economic motivation to avoid a monetary cost. Across five experiments, the authors provide evidence that people have a stronger preference to avoid tax-related costs than to avoid equal-sized (or larger) monetary costs unrelated to taxes. Tax aversion affects consumer preferences in a variety of domains, including standard store purchases, financial investments, and job selection. Furthermore, this tendency is most prevalent among people who identify with political parties that generally favor less taxation. Finally, encouraging participants who identify with “antitax” parties to cons...

Millionaire migration and state taxation of top incomes: evidence from a natural experiment

Abstract: This paper examines the migration response to a millionaire tax in New Jersey, which raised its income tax rate on top earners by 2.6 percentage points to 8.97 percent, one of the highest tax rates in the country. Drawing on unique state tax micro-data, we estimate the migration response of millionaires to the rate increase, using a difference-in-differences estimation strategy. The results indicate little responsiveness, with semi-elasticities generally below 0.1. Tax-induced migration is estimated to be higher among people of retirement age, people living on investment income rather than wages, and people who work (and pay tax) entirely in-state. The tax is estimated to raise $1 billion per year and modestly reduce income inequality.

The Welfare Effects of Environmental Taxation

Abstract: Recent literature has investigated whether the welfare gains from environmental taxation are larger or smaller in a second-best setting than in a first-best setting. This question has mainly been addressed indirectly, by asking whether the second-best optimal environmental tax is higher or lower than the first-best Pigouvian rate. Even this indirect question has itself been approached indirectly, comparing the second-best optimal environmental tax to a proxy for its first-best value, marginal social damage (MSD). On closer examination, however, MSD becomes ambiguously defined and variable in a second-best setting making it an unreliable proxy for the Pigouvian rate. Given these observations, the current analysis reevaluates these welfare questions and finds that when compared directly to its first-best value, the second-best optimal environmental tax generally rises with increased revenue requirements. Even in cases where the second-best environmental tax is lower than its first-best value, the welfare gains may be greater than in a first-best setting. These results suggest that the marginal fiscal benefit (revenue recycling effect) exceeds the marginal fiscal cost (tax base effect) over a range of environmental tax rates that, for benchmark models, extends above the first-best Pigouvian rate. These findings reinforce the intuition that environmental policy complements rather than competes with the provision of other public goods.

Tax Morale and Compliance: Review of Evidence and Case Studies for Europe

Abstract: This paper provides an overview of the literature on tax morale and tax compliance. Most of the material here is based on research that I have conducted together with my co-authors over the last 10 years. Europe has a dominant place in this paper. Sometimes results derived from other countries are discussed that could be relevant for Europe. The overall findings show the importance of accountability, democratic governance, efficient, and transparent legal structures and therefore trust within the society to enforce tax compliance and tax morale.

The Surprising Incidence of Tax Credits for the Toyota Prius

Abstract: Federal and state governments in the United States have responded to rising concerns about the consequences of petroleum consumption in part by introducing tax subsidies for new vehicles that feature fuel-efficient technologies, including gas-electric hybrids. These policies aim to reduce oil consumption in the personal transportation sector, which accounts for 40 percent of gasoline consumption and 20 percent of greenhouse gas emissions (U.S. Environmental Protection Agency 2007). At the federal level, the Energy Policy Act of 2005 introduced a substantial personal income tax credit for hybrids. At the state level, thirteen states have passed tax incentives for hybrids, and many others have considered similar actions. In this paper, I determine who benefits from tax incentives for hybrids using transaction level microdata to estimate the incidence of existing subsidies for the Toyota Prius. I find that consumers capture nearly all of the benefits of tax subsidies. Transaction prices for the Prius did not change following changes of up to $2,650 in subsidy value. Since consumers receive the subsidy directly from the government after their purchase, constant transaction prices imply that consumers captured the benefits of government intervention. This finding has implications for the evaluation of existing and future policies. It also has broader implications for the study of tax incidence

Optimal tax policy when firms are internationally mobile

Abstract: The standard tax theory result that investment should not be distorted is based on the assumption that profits are locally bound. In this paper, we analyze the optimal tax policy in a model where firms are internationally mobile. We show that the optimal policy response to increasing firm mobility may be taxation, subsidization, or non-distortion of the marginal investment, depending on whether the mobile firms are more or less profitable than the average firm in the economy. Our findings may contribute to understanding recent tax policy developments in many OECD countries.

To assemble to resemble? A study of tax disparities among French municipalities

Abstract: The purpose of this paper is to analyze the effect of inter-municipal cooperation on local taxation. Municipalities that join/create an inter-municipal jurisdiction choose between three tax regimes, which may induce both horizontal and vertical tax externalities. Using the differences in differences method with a quasi-exhaustive panel for French municipalities over the 1994-2010 period, we show a positive causal effect of cooperation on the level of cumulative tax rates (i.e. the sum of municipal and inter-municipal tax rates). Moreover, we show that cooperation leads to a convergence of tax rates within an inter-municipal structure, which thus reduces tax disparities among municipalities.

The Tobin Tax: A Review of the Evidence

Abstract: Summary The debate about the Tobin tax, and other financial transaction taxes (FTTs), gives rise to strong views both for and against. Unfortunately, little of the popular debate refers to the now considerable body of evidence about the impact of such taxes. This review attempts to synthesise what we know from the available theoretical and empirical literature about the impact of FTTs on volatility in financial markets. We also review the literature on how a Tobin tax might be implemented, the amount of revenue that it might realistically produce, and the likely incidence of the tax. We conclude that, contrary to what is often assumed, a Tobin tax is feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions. However, it would be unlikely to reduce market volatility and could even increase it.