nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2010‒10‒09
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Competition and Welfare Effects of VAT Exemptions By Helmut Dietl; Christian Jaag; Markus Lang; Urs Trinkner
  2. Base-Broadening Tax Reforms By Callan, Tim; Keane, Claire; Walsh, John R.
  3. Tax progression: International and intertemporal comparisons using LIS data By Kirill Pogorelskiy; Christian Seidl; Stefan Traub
  4. Taxation Reforms: a CGE-Microsimulation Analysis for Pakistan By Saira Ahmed; Vagar Ahmed; Ahsan Abbas
  5. The New IAS 19 Exposure Draft By Clara Severinson
  6. Endogenous Credit Constraints, Human Capital Investment and Optimal Tax Policy By Hongyan Yang
  7. Taxpayers' Response to Warnings of a Possible Tax Audit: Do They Change Their Compliance Behavior? By Niu, Yongzhi
  8. Strategic accounting choice around firm level labour negotiations By Ana María Sabater; Araceli Mora; Beatriz García Osma
  9. Designing a property tax without property values: Analysis in the case of Ireland By Mayor, Karen; Lyons, Seán; Tol, Richard S. J.

  1. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Christian Jaag (Institute of Public Finance and Fiscal Law, University of St. Gallen); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Urs Trinkner (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: Distortions under the value-added tax (VAT) arise mainly from the exemption of specific services and sectors. This paper develops an analytical model that is applicable to any sector characterized by asymmetric VAT exemptions of services and activities or differentiated VAT rates. We analyze the effects of such asymmetric VAT regimes on market shares, optimal prices, and tax receipts analytically and by simulation. The analytical model shows how asymmetric VAT exemptions distort competition by strengthening the competitive position of non-rated firms. The net effect of VAT exemptions depends on the fraction of VAT rated inputs versus the fraction of non-rated customers. We further shed light on the main competitive impact of VAT policies, while showing the consequences on overall welfare by presenting simulation results based on a calibrated quantitative model of a selected sector. The contribution of our paper is to provide guidance on how to resolve the policy trade-off between a level playing field, consumer surplus and government tax revenue.
    Keywords: Value-added tax, indirect taxation, tax regulation, tax exemption, universal service obligation, postal sector
    JEL: H21 H25 L51 L87
    Date: 2010–09
  2. By: Callan, Tim; Keane, Claire; Walsh, John R.
    Keywords: taxes
    Date: 2010–07
  3. By: Kirill Pogorelskiy (State University – Higher School of Economics, Moscow, Russia); Christian Seidl (University of Kiel, Germany); Stefan Traub (University of Bremen, Germany)
    Abstract: The conventional approach to comparing tax progression (using local measures, global measures or dominance relations for first moment distribution functions) often lacks applicability to the real world: local measures of tax progression have the disadvantage of ignoring the income distribution entirely. Global measures are affected by the drawback of all aggregation, viz. ignoring structural differences between the objects to be compared. Dominance relations of comparing tax progression depend heavily on the assumption that the same income distribution holds for both situations to be compared, which renders this approach impossible for international and intertemporal comparisons. Based on the earlier work of one of the authors, this paper develops a unified methodology to compare tax progression for dominance relations under different income distributions. We address it as uniform tax progression for different income distributions and present the respective approach for both continuous and discrete cases, the latter also being employed for empirical investigations. Using dominance relations, we define tax progression under different income distributions as a class of natural extensions of uniform tax progression in terms of taxes, net incomes, and differences of first moment distribution functions. To cope with different monetary units and different supports of the income distributions involved, we utilized their transformations to population and income quantiles. Altogether, we applied six methods of comparing tax progression, three in terms of taxes and three in terms of net incomes, which we utilized for empirical analyses of comparisons of tax progression using data from the Luxembourg Income Study. This is the first paper that performs international and intertemporal comparisons of uniform tax progression with actual data. For our analysis we chose those countries for which LIS disposes of data on gross incomes, taxes, payroll taxes and net incomes. This pertains to 15 countries, out of which we selected 13. This gave rise to 78 international comparisons, which we carried out for household data, equivalized data, direct taxes and direct taxes inclusive of payroll taxes. In total we investigated 312 international comparisons for each of the six methods of comparing tax progression. In two thirds of all cases we observed uniformly greater tax progression for international comparisons. In a bit more than one fifth of all cases we observed bifurcate tax progression, that is, progression is higher for one country up to some population or income quantile threshold, beyond which the situation is the opposite, i.e., progression is higher for the second country. No clear-cut findings can be reported for just one tenth of all cases. But even in these cases some curve differences are so small that they may well be ignored. We also test consistency of our results with regard to the six methods of comparing tax progression and present here twelve (Germany, the UK and the US) plus four comparing Germany and Sweden out of the total of 312 graphs, each containing six differences of first moment distribution functions. These differences can be interpreted as intensity of greater tax progression. We demonstrate the overall picture of uniform tax progression for international comparisons using Hasse diagrams.Concerning intertemporal comparisons of tax progression, we present the results for the US, the UK, and Germany for several time periods. We align our findings with respect to major political eras in these countries, e.g., G. Bush senior, W. Clinton, and G. Bush junior for the United States; M. Thatcher, J. Major, and A. Blair for the United Kingdom, and for Germany, the last year before German re-unification (1989), the beginning of H. Kohl’s last term as chancellor (1994), and G. Schröder (2000). In addition, we study sensitivity of our results to the equivalence scale parameter.
    Keywords: income tax progression, measurement of uniform tax progression, comparisons of tax progression, tax progression with different income distributions.
    JEL: H23 H24
    Date: 2010
  4. By: Saira Ahmed; Vagar Ahmed; Ahsan Abbas
    Abstract: This paper provides an ex ante assessment of taxation reforms being considered in Pakistan, in order to widen the tax base and rationalise the rate structure of different taxes. Amongst the main proposals, those focusing on sales tax and agricultural direct taxes seem relatively more attractive. The former has the highest share in indirect taxes and is also easier to collect, while the latter is intended to bring the presently exempted agricultural incomes into the tax net. As a first step, we study the general equilibrium effects of existing taxes by removing them from the system one at a time. In the second step we study the micro-macro impacts of four policy experiments: a) increasing sales tax rate by 33 percent; b) applying a 10 percent sales tax on presently zero-rated goods; c) increasing sales tax rate by 33 percent and bringing the services sectors in the sales tax net; and d) increasing sales tax rate by 33 percent, bringing the services sectors in the sales tax net, and imposing a 5 percent flat tax on agricultural incomes. In the third step we calculate the lost revenue due to evasion and avoidance. Results from experiments indicate the tough choices for policy makers in trying to improve the currently low tax to GDP ratio in Pakistan. Almost all simulations result in a decrease in investment levels, reduced consumption, and an increase in poverty. We thus recommend a gradual approach to tax reform that can make the adjustment process less painful.
    Keywords: Taxation, Microsimulation, General Equilibrium, Poverty, Inequality, Progressivity, Redistribution
    JEL: H22 D58 C51 C81 I32
    Date: 2010
  5. By: Clara Severinson
    Abstract: At the end of April 2010, the International Accounting Standards Board (IASB) published an exposure draft with proposed changes to International Accounting Standard No. 19 (IAS 19). IAS 19 is the current standard for the financial reporting of company pension obligations that stem from defined benefit (DB) and similar plans. It is required for exchange-listed companies in many parts of the world. If enacted, the changes to IAS 19 proposed by the IASB are expected to have a significant impact on company financials on a global basis. The following paper summarizes the proposed changes as presented in the April 2010 exposure draft and explores some of their implications. This paper does not cover all the changes proposed by the IASB but attempts to focus on some key and controversial issues.
    Keywords: IAS 19, pension accounting
    JEL: G23 G32 M41 M52
    Date: 2010–09
  6. By: Hongyan Yang (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper employs a two-period life-cycle model to derive the optimal tax policy when educational investments are subject to credit constraints. Credit constraints arise from the limited commitment of debitors to repay loans and are endogenously determined by private banks under the non-default condition that individuals can-not be better off by defaulting. We show that the optimal redistributive taxation trades the welfare gain of reducing borrowing demand and of changing the credit constraints against the efficiency costs of distorting education and labor supply. In addition, we compare the optimal taxation with that when credit constraints are taken as given. If income taxation decreases (increases) the borrowing limit, taking credit constraints as given leads to a too high (low) labor tax rate. Thus, ignoring the effects of tax policy on credit constraints overestimates (underestimates) the welfare effects of income taxation. Numerical examples show that income taxation tightens the credit constraints and the optimal tax rates are lower when credit constrains are endogenized. The intuition is that redistributive taxation reduces the incentive to invest in education and to work, thus exaggerating the moral hazard problems associated with credit constraints.
    Keywords: labor taxation, human capital investment, credit constraints
    JEL: H21 I2 J2
    Date: 2010–09–30
  7. By: Niu, Yongzhi
    Abstract: In 2008, the New York State Department of Taxation and Finance sent letters to clients of a fraudulent tax preparer, warning them of a possible audit and asking them to participate in the Department’s Voluntary Disclosure and Compliance Program if they had filed inaccurate tax returns in the past. This study examines the impact of the letters on voluntary compliance in their future (2008 and 2009) returns. In this study, a simple method similar to “difference in differences”, which we call “difference in positions”, is applied. 10,000 samples are randomly drawn from the taxpayer population and the growth rates of Federal adjusted gross income (AGI) for these samples are put into relative frequency density graphs. We then examine the relative positions of the experiment group (the clients of the fraudulent tax preparer) within the normally distributed curves before and after the letters were sent. The change in the relative positions is regarded as the letter impact on voluntary compliance. It is found that the impact is significant in the first year (2008 tax returns) after the letters were sent. The impact is 17.49 percentage points on the AGI growth rate, which translates to $8.68 million of reported AGI for the 507 taxpayers in the experiment group. However, the impact is minimal in the second year (2009 tax returns), indicating that the long-run effect of the letter mailings may be weak.
    Keywords: tax; audit impact; voluntary compliance; differnces-in-differences; difference-in-positions; personal income tax
    JEL: H29 H26
    Date: 2010–09–29
  8. By: Ana María Sabater (Universidad de Alicante); Araceli Mora (Universitat de València); Beatriz García Osma (Universidad Autónoma de Madrid)
    Abstract: We study accounting choice around firm-level collective agreement negotiations. Prior literature argues that managers make income-decreasing accounting choices to limit the concessions made to trade unions. However, empirical research to date fails to find evidence in support of this hypothesis. We expect that this lack of evidence is driven by the confounding effects of (i) methodological concerns and (ii) influential institutional factors. Using a sample of US firms that engage in firm-level labor bargaining during the period 1994-2007, we study whether managers act strategically in an attempt to reduce the proportion of firm wealth that is accrued to employees. Our findings suggest that managers take real rather than accounting actions to minimize payments. In particular, we find evidence consistent with (i) managerial strategic timing of the negotiation, and with (ii) increased conditional conservatism in the year of labor bargaining. We do not find evidence of earnings manipulation. This potentially signals that accounting choice around labor negotiations is informative rather than opportunistic. Keywords: accounting choice, earnings quality, collective bargaining. En el presente trabajo se estudia la elección de políticas contables en torno a la negociación de convenios colectivos. La literatura previa predice que los gerentes tratan de reducir el resultado contable para minimizar las concesiones realizadas a los sindicatos. Sin embargo, no hay evidencia empírica clara hasta la fecha que ratifique esta hipótesis. Esperamos que esta falta de evidencia se justifique por (i) problemas metodológicos de estudios previos, y (ii) la influencia de factores institucionales. Empleando una muestra de empresas de EEUU que negocian un convenio colectivo entre 1994 y 2007, se estudia si los gerentes actúan estratégicamente para reducir el porcentaje de renta empresarial que se transfiere a los trabajadores. Nuestros resultados sugieren que los gerentes se valen de decisiones operativas en lugar de contables para minimizar los pagos a empleados. En particular, encontramos evidencia de (i) elección estratégica de cuándo negociar, y (ii) mayor conservadurismo contable en el año del evento. No encontramos evidencia de gestión oportunista del resultado, lo que potencialmente indica que las decisiones contables en torno a la negociación colectiva son informativas.
    Keywords: elección contable, calidad del resultado, negociación colectiva
    JEL: M41 J30 J51
    Date: 2010–09
  9. By: Mayor, Karen; Lyons, Seán; Tol, Richard S. J.
    Abstract: We examine the implications of using hedonic regressions of house values as the basis for property tax assessment in the Republic of Ireland. Ad valorem property taxes are more equitable than flat rate taxes, but their equity benefits can be reduced if the relative values of dwellings are inaccurately assessed. Achieving greater accuracy in assessment tends to increase administrative costs, so policymakers face a trade-off between cost and accuracy. Using the Irish National Survey of Housing Quality of 2002, this study analyses the contribution that information about selected property characteristics can make to determine the relative values of residential properties in Ireland. These characteristics are the location of the dwelling, house size in square meters, the number of rooms and bedrooms in the home, the age of the house and the type of dwelling. The values of residential properties are estimated using these variables in turn and the prediction errors are presented in terms of the absolute value error and the assessment ratio (the estimated value divided by the market value). We find that it is possible to assign approximately 80% of houses nationally within the correct tax valuation band using just one of five house characteristics. Households whose house price is under assessed tend to be those with the greatest means (highly skilled professionals and high income earners), so a tax assessment system based on this type of valuation would tend to make regressive errors (while a property tax itself is regressive too). Consequently, checks would need to be put in place in order to more accurately estimate very highly priced properties as well as introducing exemptions for lower value properties and low income groups. The system could also be used to identify likely mis-reporting if using a self-assessment system.
    Keywords: hedonic regression/Ireland/property tax
    Date: 2010

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