nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2010‒10‒30
seven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. An annotated bibliography of tax compliance and tax compliance costs By James, Simon; Edwards, Alison
  2. "The Transition from Industrial Capitalism to a Financialized Bubble Economy" By Michael Hudson
  3. The Welfare Gains of Age Related Optimal Income Taxation By Bastani, Spencer; Blomquist, Sören; Micheletto, Luca
  5. The housing crisis and state and local government tax revenue: five channels By Byron Lutz; Raven Molloy; Hui Shan
  6. Subnational taxation in developing countries : a review of the literature By Bird, Richard M.
  7. Composition of Capital Flows: A Survey By Koralai Kirabaeva; Assaf Razin

  1. By: James, Simon; Edwards, Alison
    Abstract: An annotated bibliography of tax compliance and tax compliance costs.
    Keywords: tax; tax compliance; compliance costs; bibliography; tax evasion; tax avoidance; auditing; tax simplification
    JEL: H20 H0 H24 H83 H26
    Date: 2010–10
  2. By: Michael Hudson
    Abstract: For the past decade, the U.S. economy has been driven not by industrial investment but by a real estate bubble. Although the United States may seem to be the leading example of industrial capitalism, its economy is no longer based mainly on investing in capital goods to employ labor to produce output to sell at a profit. The largest sector remains real estate, whose cash flow (EBITDA, or earnings before interest, taxes, depreciation, and amortization) accounts for over a quarter of national income. Financially, mortgages account for 70 percent of the U.S. economy’s interest payments, reflecting the fact that real estate is the financial system’s major customer. As the economy’s largest asset category, real estate generates most of the economy’s capital gains. The gains are the aim of real investors, as the real estate sector normally operates without declaring any profit. Investors agree to pay their net rental income to their mortgage banker, hoping to sell the property at a capital gain (mainly a land-price gain). The tax system encourages this debt pyramiding. Interest and depreciation absorb most of the cash flow, leaving no income tax due for most of the post-1945 period. States and localities have shifted their tax base off property onto labor via income and sales taxes. Most important, capital gains are taxed at a much lower rate than are current earnings. Investors do not have to pay any capital gains tax at all as long as they invest their gains in the purchase of new property. This tax favoritism toward real estate—and behind it, toward bankers as mortgage lenders—has spurred a shift in U.S. investment away from industry and toward speculation, mainly in real estate but also in the stock and bond markets. A postindustrial economy is thus largely a financialized economy that carries its debt burden by borrowing against capital gains to pay the interest and taxes falling due.
    Keywords: Real Estate; Financialization; Capital Gains; Land Rent; Land Value; National Income Accounting; Bubble Economy
    JEL: G1 N2
    Date: 2010–10
  3. By: Bastani, Spencer (Uppsala Center for Fiscal Studies); Blomquist, Sören (Uppsala Center for Fiscal Studies); Micheletto, Luca (Uppsala Center for Fiscal Studies)
    Abstract: Using a calibrated overlapping generations model we quantify the welfare gains of an age dependent income tax. Agents face uncertainty regarding future abilities and can by saving transfer consumption across periods. The welfare gain of switching from an age-independent to an age-dependent nonlinear tax amounts in our benchmark model to around three percent of GDP. The gains are particularly high when there are restrictions on debt policy. The gains of using a nonlinear- as opposed to a linear tax are even larger. Surprisingly, it is of secondary importance to optimally choose the tax on interest income.
    Keywords: labor income taxation; capital income taxation; age-dependent taxes; OLG model
    JEL: H21 H23 H24
    Date: 2010–10–25
  4. By: Charl Jooste (Department of Economics, University of Pretoria); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: Research on tax elasticities in South Africa mainly employs linear models and shows that taxes evolve symmetrically irrespective of the economic cycle. This study extends this research to show that taxes behave asymmetrically and nonlinearly during expansions and contractions. Estimated linear elasticities imply that a one percent expansion in the cycle increases personal income tax, corporate income tax and value added tax by 1.43, 2.52 and 0.99 percent, respectively. However, estimated nonlinear elasticities are significantly different. During an expansion, the above elasticities increase by 1.89, 2.76 and 2.17 percent, respectively while during a contraction phase these elasticities increase by 0.89, 0.88 and 0.82 respectively. This finding of low tax collection during economic contractions has important implications for fiscal sustainability and overall fiscal prudence in South Africa. The findings of high tax elasticities during expansions might explain the underestimation of revenue by the government.
    Keywords: structural budget balance, tax elasticities, nonlinearity, Smooth Transition Regression, Autoregressive Distributed Lag
    JEL: C51 H20 H25
    Date: 2010–10
  5. By: Byron Lutz; Raven Molloy; Hui Shan
    Abstract: State and local government tax revenues dropped steeply following the most severe housing market contraction since the Great Depression. We identify five main channels through which the housing market affects state and local tax revenues: property tax revenues, transfer tax revenues, sales tax revenues (including a direct effect through construction materials and an indirect effect through the link between housing wealth and consumption), and personal income tax revenues. We find that property tax revenues do not tend to decrease following house price declines. We conclude that the resilience of property tax receipts is due to significant lags between market values and assessed values of housing and the tendency of policy makers to offset declines in the tax base with higher tax rates. The other four channels have had a relatively modest effect on state tax revenues. We calculate that these channels jointly reduced tax revenues by $15 billion from 2005 to 2009, which is about 2 percent of total state own-source revenues in 2005. We conclude that the recent contraction in state and local tax revenues has been driven primarily by the general economic recession, rather than the housing market per-se.
    Date: 2010
  6. By: Bird, Richard M.
    Abstract: This paper reviews the literature on tax assignment in decentralized countries. Ideally, own-source revenues should be sufficient to enable at least the richest subnational governments to finance from their own resources all locally-provided services that primarily benefit local residents. Subnational taxes should also not unduly distort the allocation of resources. Most importantly, to the extent possible subnational governments should be accountable at the margin for financing the expenditures for which they are responsible. Although reality in most countries inevitably falls far short of these ideals, nonetheless there are several taxes that subnational governments in developing countries could use to help ensure that decentralization yields more of the benefits it appears to promise in theory. At the local level, such taxes include property taxes and, especially for larger cities, perhaps also a limited and well-designed local business tax. At the regional level, in addition to taxes on vehicles, governments in some countries may be able to utilize any or all of the following -- a payroll tax; a simple surcharge on the central personal income tax; and a sales tax, in some cases perhaps taking the form of a well-designed regional value-added tax. The"best"package for any particular country or subnational government is likely to be not only context-specific and path-dependent, but also highly sensitive to the balance struck between different political and economic factors and interests.
    Keywords: Subnational Economic Development,Public Sector Economics,Taxation&Subsidies,Debt Markets,Public&Municipal Finance
    Date: 2010–10–01
  7. By: Koralai Kirabaeva; Assaf Razin
    Abstract: We survey several key mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). In particular, we focus on the following market frictions: asymmetric information in capital markets and exposure to liquidity shocks. We show that the information asymmetry between foreign and domestic investors leads to inefficient investment allocation and borrowing in a country that finances its domestic investment through foreign debt or foreign equity. Exposure to liquidity shocks due to the mismatch of debt maturity may induce banking crises and cause sudden reversals of short-term capital flows. When there is asymmetric information between sellers and buyers in the capital market, then due to the adverse selection foreign direct investment is associated with higher liquidation costs than portfolio investment. The difference in exposure to liquidity shocks (in addition to asymmetric information) can explain the composition of equity flows between developed and emerging countries, and the patterns of foreign direct investments during financial crises.
    JEL: F3
    Date: 2010–10

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