nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2006‒12‒22
four papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Taxing Sales Under the FairTax: What Rate Works? By Paul Bachman; Jonathan Haughton; Laurence J. Kotlikoff; Alfonso Sanchez-Penalver; David G. Tuerck
  2. Making Maximum Use Of Tax-Deferred Retirement Accounts By Janette Kawachi; Karen E. Smith; Eric J. Toder
  3. Capital Markets, Ownership and Distance By Wendy Carlin; Andrew Charlton; Colin Mayer
  4. What Do Independent Directors Know? Evidence from Their Trading By Enrichetta Ravina; Paola Sapienza

  1. By: Paul Bachman; Jonathan Haughton; Laurence J. Kotlikoff; Alfonso Sanchez-Penalver; David G. Tuerck
    Abstract: As specified in Congressional bill H.R. 25/S. 25, the FairTax is a proposal to replace the federal personal income tax, corporate income tax, payroll (FICA) tax, capital gains, alternative minimum, self-employment, and estate and gifts taxes with a single-rate federal retail sales tax. The FairTax also provides a prebate to each household based on its demographic composition. The prebate is set to ensure that households pay no taxes net on spending up to the poverty level. Bill Gale (2005) and the President's Advisory Panel on Federal Tax Reform (2005) suggest that the effective (tax inclusive) tax rate needed to implement H.R. 25 is far higher than the proposed 23% rate. This study, which builds on Gale's (2005) analysis, shows that a 23% rate is eminently feasible and suggests why Gale and the Tax Panel reached the opposite conclusion. This paper begins by projecting the FairTax's 2007 tax base net of its rebate. Next it calculates the tax rate needed to maintain the real levels of federal and state spending under the FairTax. It then determines if an effective rate of 23% would be sufficient to fund 2007 estimated spending or if not, the amount by which non-Social Security federal expenditures would need to be reduced. Finally, it shows that the FairTax imposes no additional real fiscal burdens on state and local government, notwithstanding the requirement that such governments pay the FairTax when they purchase goods and services. Implementing the FairTax rate of 23% would produce $2,586 billion in federal tax revenues which is $358 billion more than the $2,228 billion in tax revenues generated by the taxes it repeals. Adjusting the base for the prebate and the administrative credit paid to businesses and states for collecting the tax results in a net tax base of $9,355 billion. In 2007, spending at current levels is projected to be $3,285 billion. Revenues from the FairTax at a 23% tax rate, plus other federal revenues, are estimated to yield $3,209 billion which is $76 billion less than current CBO spending projections for 2007. The $76 billion amounts to only 2.73% of non-Social Security spending ($2,177 -- $2,101). This is a remarkably small adjustment when set against the more than 30% rise in the real value of these expenditures since 2000. Ensuring real revenue neutrality at the federal level, given the net base of $9,355 billion, implies a rate of 23.82% on a tax-inclusive basis and 31.27% on a tax-exclusive basis. These and other calculations presented here ignore a) general equilibrium feedback (supply-side and demand-side) effects that could significantly raise the FairTax base (see, for example, Kotlikoff and Jokisch, 2005), b) the possibility that tax evasion would exceed the considerable amount automatically incorporated here via the use of NIPA data, which undercount consumption expenditures due to evasion under the current tax system, and c) the roughly $1 trillion real capital gain the federal government would secure on its outstanding nominal debt, were consumer prices to rise by the full amount of the FairTax. The FairTax redistributes real purchasing power from state and local governments to their state and local income-tax taxpayers. It does so by reducing factor prices relative to consumer prices and, thereby, reducing the real value (measured at consumer prices) of state and local income tax payments, which are assessed on factor incomes (namely, factor supplies times factor prices). Gale (2005) and the Tax Panel (2005) recognized this loss in real state and local government revenues in claiming that these governments need to be compensated for having to pay the FairTax. But what they apparently missed is that this loss to these governments is exactly offset by a gain to their taxpayers. Were state and local governments to maintain their real income tax collections -- the assumption made here -- by increasing their tax rates appropriately, their taxpayers' real tax burdens would remain unchanged and there would be no need for the federal government to compensate state and local governments for having to pay the FairTax on their purchases. The second is that H.R. 25 does not preclude state and local governments from levying their sales taxes on the FairTax-inclusive price of consumer goods and services. This produces significantly more revenue compared to levying their sales taxes on producer prices. Moreover, Gale (2005) and the Tax Panel (2005) arrived at a higher tax rate because they did not estimate the Fairtax rate, but instead estimated a sales tax of their own design which had a substantially narrower base.
    JEL: H1 H2
    Date: 2006–12
  2. By: Janette Kawachi (Urban Institute); Karen E. Smith (Urban Institute); Eric J. Toder (Urban Institute)
    Abstract: The share of workers who participate in employer-sponsored tax-deferred plans has been growing, but is still only a minority of workers. Most workers do not contribute the maximum amount allowed by law to employer-sponsored plans. Maximum contributors are more prevalent among high-income compared with low-income workers, college graduates compared with those with less education, non-Hispanic whites and others compared with non-Hispanic blacks and Hispanics, and single and married people, ompared with those who are widowed or divorced. The percentage of participants who contribute the maximum to employersponsored plans almost doubled between 1990 and 2003, but virtually all the growth in maximum participation came from groups with high shares of maximum contributors in 1990. The share of participants who are large contributors – defined as contributing the aximum or 10 percent of their earnings to plans – also nearly doubled. For large contributors, the growth came from all income and demographic groups, although growth also increased the most (in percentage points) for groups with large shares in 1990. Holding all other factors constant, we find an upward trend in the share of large contributors among high-earners, but not among low-earners. Shares of both maximum and large contributors are increasing more over time for higher than for lower earning groups. Recent increases in contribution limits can be expected to reduce shares of maximum contributors, but raise relative shares of maximum contributors among highearning and education groups. Increases in contribution limits do little to increase retirement preparedness among lower-income groups.
    Keywords: tax-deferred, retirement, minority workers
    Date: 2006–06–22
  3. By: Wendy Carlin; Andrew Charlton; Colin Mayer
    Abstract: This paper uses a new data-set to examine how internal capital markets and foreignownership affect investment. Our data allow us to compare investment behaviour of listedsubsidiaries with stand-alone firms while controlling for investment opportunities of parentand subsidiary firms. We evaluate how the size of ownership and the geographical proximityof majority owners to their subsidiaries affect firm investment efficiency. We find that theinvestment of subsidiaries is more sensitive to investment opportunities than that of standalonefirms and falls when investment opportunities of parent firms improve. This suggeststhat there are internal capital markets that reallocate funds towards units with betterinvestment opportunities. We find that investment allocation is most efficient where parentshave modest ownership stakes and are distant from their subsidiaries and when subsidiariesoperate in well developed financial markets. These results indicate that influence costsimposed by dominant parents may outweigh their potential informational benefits, especiallywhen subsidiaries are located in countries with weaker financial development.
    Keywords: Investment, Internal Capital Markets, Foreign Ownership
    JEL: F21 G31
    Date: 2006–08
  4. By: Enrichetta Ravina; Paola Sapienza
    Abstract: We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with weaker governance and the gap between these two groups widens in such firms. Independent directors who sit in audit committees earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around a restatement announcement.
    JEL: G34 G38
    Date: 2006–12

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