nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2010‒06‒11
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Calculating tax shields from financial expenses with losses carried forward By Ignacio Velez Pareja
  2. State Corporation Income Taxation: An Economic Perspective on Nexus By David E.Wildasin
  3. Tax Evasion and Community Effects in Italy By Francesco Flaviano Russo
  4. Firm valuation: tax shields & discount rates By Ansay, Thomas
  5. Accounting and the welfare-state: The missing link By Oehr, Tim-Frederik; Zimmermann, Jochen
  6. Fiscal Illusion and Fiscal Obfuscation:An Empirical Study of Tax Perception in Sweden By Sanandaji, Tino; Wallace, Björn
  7. The Economic Effects of Replacing the Property Tax with a Sales or Income Tax:A Computable General Equilibrium Approach By Dagney Faulk; Nalitra Thaiprasert; Michael Hicks
  8. Are Democrats conservative? Towards a theory of the role of standard setters in standard setting By Abigail McIntosh Allen; Karthik Ramanna
  9. The fiscal anatomy of a regulatory polity: Tax policy and multilevel governance in the EU By Genschel, Philipp; Jachtenfuchs, Markus

  1. By: Ignacio Velez Pareja
    Abstract: When calculating the Weighted Average Cost of Capital (WACC), the well-known textbook formula includes tax shields with the (1-T) factor affecting the contribution of debt to WACC. In this work we develop a procedure for properly calculating tax shields including the case when Losses Carried Forward are allowed and there is Other Income. The proper calculation of tax shields is relevant because the value of tax shields might be a substantial part of firm value. We show that tax shields depend on Earnings before Interest and Taxes and therefore the risk of tax shields is the risk of the free cash flow; this is the cost of unlevered equity.
    Date: 2010–06–03
  2. By: David E.Wildasin (University of Kentucky)
    Abstract: Acting in the interest of their residents, within limits imposed by Federal statute and by the Constitution, states have incentives to impose taxes on the profits of corporations owned by nonresidents. This paper presents a model within which a state, using an apportionment formula that includes a sales factor, would choose to tax the income of out-of-state corporations that derive revenues from the sale or licensing of intangible assets to in-state customers, provided that such corporations have sufficient nexus to be taxable. Although such policies enable states to capture rents from nonresidents, they also introduce tax distortions by imposing implicit tariffs on sales by out-of-state firms.
    Keywords: Corporate Taxation, Nexus
    Date: 2010
  3. By: Francesco Flaviano Russo (University of Napoli Federico II and CSEF)
    Abstract: I propose an analysis of tax evasion in Italy using the data collected by the website This site collects reports by random internet users of the transactions in which they were involved that, lacking any legal receipt, were hidden from the tax authority. I interpret this experiment as a test of the attitude towards tax evasion by the community in which the tax offender operates: less reported episodes are an indication of a more lenient attitude. Since a more lenient attitude of the community is a lower cost of evading taxes, a smaller number of reports must be associated to less tax evasion. I show that the data confirm this claim. I also show that the presence of younger, less educated individuals and the size of the irregular labor force are associated to a more lenient attitude towards tax evasion.
    Keywords: Tax Morale, Tax Evasion Reports
    JEL: K34
    Date: 2010–06–03
  4. By: Ansay, Thomas
    Abstract: This paper proposes a new discounted cash flows’ valuation setup, and derives a general expression for the tax shields’ discount rate. This setup applies to any debt policy and any cash flow pattern. It only requires the equality at any time between the assets side and the liabilities side of the market value balance sheet, which has been introduced by Farber, Gillet and Szafarz (2006). This concept is extensively developed in the paper. This model encompasses all the usual setups that consider a fixed discount rate for the tax shields and require a fixed level of debt or a fixed leverage ratio, in particular Modigliani & Miller (1963) and Harris & Pringle (1985). It proposes an endogenized and integrated approach and modelizes the different market value discount rates as functions of both their relevant leverage ratio and the operating profitability of the firm. Among these rates are the cost of debt and the tax shields’ discount rate, which are usually assume constant. In this model, all the discount rates are likely to vary as soon as perpetuity cases are not considered. This setup introduces a new rate for the cost of levered equity without tax shields and develops the relation between the present value of tax shields and the market value of equity since debt tax shields entirely flow to equity. It only requires the risk free rate and the unlevered cost of capital as inputs but not the capital structure of the firm, as it tackles the circularity problem by considering an iterative approach. This fully dynamic model yields both theoretical and economic sensible results, and allows straightforward applications. It apparently solves the discrepancies of the usual setups and hopefully paves the way for further research.
    Keywords: Discounted Cash Flow; Tax Shields; Discount Rates; Cost of Equity; Cost of Capital; Tax Shield Risk; Adjusted Present Value; Equity Cash Flow
    JEL: O16 G3
    Date: 2009–09–21
  5. By: Oehr, Tim-Frederik; Zimmermann, Jochen
    Abstract: In recent years, accounting regulation has been internationalized with the extensive use and adoption of International Financial Reporting Standards (IFRS) by nation-states, which points at least to a formal convergence between accounting regulatory systems. However, major differences between national accounting systems persist. In this paper, it is argued that a country's accounting system is influenced by the type of the welfare-state. This allows us to see accounting in a broader social perspective. The societal attitudes influencing the accounting system are captured by using the Esping-Andersen (1990) classification of welfare states. To show that there is a connection between the typology of welfare-states and the way in which various corporate constituencies' interests are balanced, we compare Germany as an example of a conservative welfare-state and the UK as an example of a liberal welfare-state. This comparison shows that the type of welfare state exerts an influence on the system of accounting and, therefore, can be seen as an explanatory variable for persisting differences between accounting regulatory systems. -- In den letzten Jahren deuten zahlreiche Veränderungen im Bereich der nationalen Regulierung der Rechnungslegung zumindest auf eine formale Konvergenz zwischen den regulatorischen Systemen der Rechnungslegung hin. Abgeleitet werden kann dies aus der mittlerweile weitreichenden Anwendung und Einführung des internationalen Rechnungslegungsstandardwerkes IFRS durch zahlreiche Nationalstaaten. Allerdings bestehen auch weiterhin wesentliche Unterschiede zwischen nationalen Rechnungslegungssystemen fort. Mit diesem Arbeitspapier wird die Hypothese vertreten, dass das Rechungslegungssystem in einem Land und damit die Unterschiede zwischen Ländern maßgeblich durch den Typ des Wohlfahrtsstaates beeinflusst werden. Dieses erlaubt eine weitergefasste gesellschaftliche Perspektive auf den Bereich der Rechungslegungsregulierung. Die einflussnehmenden gesellschaftlichen Werte werden hierbei durch die Wohlfahrtsstaatentypologie von Esping-Andersen (1990) erfasst. In einem abschließenden Länderfallbeispiel werden Deutschland (konservativer Wohlfahrtsstaatstyp) sowie Großbritannien (liberaler Wohlfahrtsstaatstyp) miteinander verglichen. Hierbei soll gezeigt werden, dass eine Verbindung zwischen dem Typ des Wohlfahrtsstaates und der Art und Weise besteht, wie Interessen verschiedener Anspruchsgruppen des Unternehmens ausgeglichen werden. Der Vergleich zeigt, dass ein Zusammenhang zwischen dem Wohlfahrtsstaatstyp und der Rechungslegungsregulierung hergestellt werden kann. Der Wohlfahrtsstaatstyp ist dementsprechend als ein wesentlicher Erklärungsfaktor für den Fortbestand von nationalen Unterschieden in der Rechnungslegungsregulierung zu sehen.
    Date: 2010
  6. By: Sanandaji, Tino (Research Institute of Industrial Economics (IFN)); Wallace, Björn (Stockholm School of Economics)
    Abstract: In this paper we present survey evidence suggesting that there exists a sizeable fiscal illusion amongst the general public in Sweden. Respondents in a nation-wide and representative survey systematically underestimate the share of an ordinary worker’s income that is transferred to the public sector. Furthermore, we make a theoretical distinction between tax illusion and fiscal obfuscation, a proposed novel type of fiscal illusion. It has previously been assumed that fiscal illusion derives from a fragmentized tax system with many small, and largely invisible, taxes which tend to be ignored or underestimated by the tax payers. We hypothesize that this systematic bias could in addition emanate from misapprehensions of the real incidence of a tax. Evidence is presented that this could apply even when taxes are few and large, contrary to the tax complexity hypothesis. When this misperception derives from seemingly deliberate tax design and tax labeling, as appears to be the case with the payroll taxes in Sweden, we call it fiscal obfuscation.
    Keywords: Fiscal Illusion; Fiscal Obfuscation; Tax Illusion; Tax Labeling; Tax Structure; Personal Income Taxation
    JEL: H11 H22 H24 H30
    Date: 2010–05–31
  7. By: Dagney Faulk (Center for Business and Economic Research, Miller College of Business, Ball State University); Nalitra Thaiprasert (Center for Business and Economic Research, Miller College of Business, Ball State University); Michael Hicks (Center for Business and Economic Research, Miller College of Business, Ball State University)
    Abstract: With the most recent wave of property tax restructuring in the U.S., policy makers have considered the possibility of replacing the property tax. In this analysis we use data for Indiana and a short-run computable general equilibrium model to examine the effects of replacing the property tax with a sales or income tax. We find that replacing the property tax with a sales or income tax has a relatively small effect on aggregate economic variables. Aggregate output in the state decreases by 2 to 3 percent. Larger effects are apparent when analyzing household groups and industry sectors. Replacing the property tax with a sales or income tax decreases household income by over three percent with the income tax being most regressive. Replacing the property tax has a negative effect on sales revenue for most industry sectors with retail sales and several other sectors experiencing large (over five percent) decreases.
    Keywords: property tax, sales tax, income tax, computable general equilibrium models
    JEL: H71 C68
    Date: 2010–06
  8. By: Abigail McIntosh Allen (Harvard Business School); Karthik Ramanna (Harvard Business School, Accounting and Management Unit)
    Abstract: We investigate the role of standard setters in standard setting. In particular, we examine how the backgrounds and personal politics of FASB members influence the nature of accounting standards proposed between 1973 and 2007. Among other results, we find that length of service on the board and a prior career in investment banking/ investment management are associated with proposing standards perceived as decreasing accounting "reliability;" while affiliation with the Democratic Party is associated with proposing standards perceived as increasing accounting "reliability." Broadly, the evidence suggests that individuals on the FASB have a wider influence in the political economy of standard setting than is currently understood.
    Keywords: accounting, FASB, politics, relevance, reliability, standard setting
    JEL: D72 D78 G18 K22 L51 M41
    Date: 2010–05
  9. By: Genschel, Philipp; Jachtenfuchs, Markus
    Abstract: The paper analyzes the common assumption that the EU has little power over taxation. We find that the EU's own taxing power is indeed narrowly circumscribed: its revenues have evolved from rather supranational beginnings in the 1950s towards an increasingly intergovernmental system. Based on a comprehensive analysis of EU tax legislation and ECJ tax jurisprudence from 1958 to 2007, we show that at the same time, the EU exerts considerable regulatory control over the member states' taxing power and imposes tighter constraints on member state taxes than the US federal government imposes on state taxation. These findings contradict the standard account of the EU as a regulatory polity which specializes in apolitical issues of market creation and leaves political issues to the member states: despite strong safeguards, the EU massively regulates the highly salient issue of member state taxation. --
    Date: 2010

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