nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2011‒02‒26
twelve papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Search costs and corporate income tax competition By Kai A. Konrad
  2. Comparing the Treatment of Charities Under Value Added Taxes and Retail Sales Taxes By Walter Hellerstein
  3. Three Essays On Tax Salience: Market Salience and Political Salience By Gamage, David; Shanske, Darien
  4. On the determinants of local tax rates: new evidence from Spain By Francisco J. Delgado; Santiago Lago-Peñas; Matías Mayor
  5. The effects of land transfer taxes on real estate markets: Evidence from a natural experiment in Toronto By Ben Dachis; Gilles Duranton; Matthew A. Turner
  6. Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals By Dhammika Dharmapala; Nadine Riedel
  7. The Elasticity of Taxable Income and the Optimal Income Tax Rate in Japan: Evidence from the Japanese Household Microdata By Yukinobu Kitamura; Takeshi Miyazaki
  8. Evolution of the Governmental Accounting Reform implementation in Greek Public Hospitals: Testing the institutional framework By Stamatiadis, Filippos; Eriotis, Nikolaos
  9. Consumption and Cash-Flow Taxes in an International Setting By Alan J. Auerbach; Michael P. Devereux
  10. Does Tax Policy Affect Executive Compensation? Evidence from Postwar Tax Reforms By Carola Frydman; Raven S. Molloy
  11. Tax Compliance by Firms and AuditPolicy By Ralph Bayer; Frank A Cowell
  12. Too Low to Be True: The Use of Minimum Thresholds to Fight Tax Evasion By Tonin, Mirco

  1. By: Kai A. Konrad (Max Planck Institute for Tax Law and Public Finance)
    Abstract: This paper studies corporate tax competition if it is costly to learn some of the elements that determine the e¤ective tax burden. Search cost may, but need not, eliminate the tax competition pressure. The outcome depends on the boundaries of tax rate and tax base choices. Search cost can explain the empirically observed tax cuts cum base broadening.
    Keywords: Costly search, tax competition, corporate taxation, monopoly pricing paradox
    JEL: H70 H87
    Date: 2011
  2. By: Walter Hellerstein (University of Georgia)
    Abstract: This paper compares the treatment of charities under value added taxes (VATs) and retail sales taxes (RSTs) from both a normative and descriptive perspective. There is general agreement that an ideal VAT and an ideal RST would tax supplies or sales in the same way by imposing a uniform levy on all sales to final consumers and relieving businesses of any economic burden from the tax, except the burden of tax collection. Although it may appear desirable to relieve charities’ purchases or sales of a VAT or RST burden to encourage charitable undertakings, attempting to support charities through modification of the VAT or RST creates a number of problems. These include undermining economic neutrality, by distorting input choices, incentivizing self-supply, and frustrating the destination principle; producing negative revenue consequences; fostering “exemption” or “rate reduction” creep; and adding to the complexity of tax administration. Because of these concerns, “best practices” for charities under a VAT or an RST counsel against special treatment within the tax regime itself and favor support of charities through direct government subsidies. In practice, however, most VAT and RST regimes do seek to provide relief for charities within the tax regime. Most VAT regimes treat charities as exempt, imposing no tax on their sales but taxing their purchases without credit or refund for taxes paid. Under the American subnational RST, over half the states with RSTs relieve charities of the burden of paying sales tax and roughly one third exempt charities’ sales from taxation, although many charities’ sales fall outside the scope of the American RST, which generally does not apply to services. As a consequence, VATs and RSTs often give rise to the problems identified above.
    Date: 2011
  3. By: Gamage, David; Shanske, Darien
    Abstract: This Article analyzes the behavioral economics literatures on how individuals understand taxation (i.e., tax salience). We evaluate how taxpayers respond to different presentations of tax prices both in their roles as market participants and as voters. We aim to combat several naïve notions about tax salience that currently exert a pernicious influence on tax lawmaking. In particular, we argue that it is normatively desirable for governments to reduce tax salience with respect to market decision making, and that there is nothing normatively objectionable about governments also reducing tax salience with respect to political decision making.
    Keywords: Economics, Law and Economics, Politics, Taxation, Taxation-Federal Income
    Date: 2011–02–15
  4. By: Francisco J. Delgado (University of Oviedo); Santiago Lago-Peñas (REDE, IEB and University of Vigo); Matías Mayor (University of Oviedo)
    Abstract: This paper studies the determinants of local tax rates. For the two main local taxes in Spain - the property tax and the motor vehicle tax - we test the existence of tax mimicking, yardstick competition and political trends in a sample of 2,713 municipalities. Using different spatial models, the results support the hypothesis of tax mimicking, with coefficients over 0.40. We also show the relevance of political variables such as the ideology of the incumbents and political fragmentation. The fact that incumbents with weaker political support display stronger mimicking behaviour is interpreted as evidence in favour of yardstick competition. Finally, we find incumbents mimic neighbouring municipalities ruled by the same political party, confirming the political trends hypothesis.
    Keywords: Local taxation, tax mimicking, yardstick competition, political trends
    JEL: C31 H71 H77
    Date: 2011
  5. By: Ben Dachis; Gilles Duranton; Matthew A. Turner
    Abstract: Taxes levied on the sale or purchase of real estate are pervasive but little studied. By exploiting a natural experiment arising from Toronto’s imposition of a Land Transfer Tax (LTT) in early 2008, we estimate the impact of real estate transfer taxes on the market for single family homes. Our data show that Toronto’s 1.1% tax caused a 15% decline in the number of sales and a decline in housing prices about equal to the tax. Relative to an equivalent property tax, the associated welfare loss is substantial, about $ 1 for every $ 8 in tax revenue. The magnitude of this welfare loss is comparable to those associated with better known interventions in the housing market. Unlike many possible tax reforms, eliminating existing LTTs in favour of revenue equivalent property taxes appears straightforward.
    Keywords: Land transfer tax, property tax, land regulation
    JEL: R21 R51
    Date: 2011–02–14
  6. By: Dhammika Dharmapala (University of Illinois at Urbana Champaign); Nadine Riedel (Oxford University Centre for Business Taxation)
    Abstract: This paper presents a new approach to estimating the existence and magnitude of tax-motivated income shifting within multinational corporations. Existing studies of income shifting use changes in corporate tax rates as a source of identification. In contrast, this paper exploits exogenous earnings shocks at the parent firm and investigates how these shocks propagate across low-tax and high-tax multinational subsidiaries. This approach is implemented using a large panel of European multinational affiliates over the period 1995 -2005. The central result is that parents’ positive earnings shocks are associated with a significantly positive increase in pretax profits at low-tax affiliates, relative to the effect on the pretax profits of high-tax affiliates. The result is robust to controlling for various other differences between low-tax and high-tax affiliates and for country-pair-year fixed effects. Additional tests suggest that the estimated effect is attributable primarily to the strategic use of debt across affiliates. The magnitude of income shifting estimated using this approach is substantial, but somewhat smaller than that found in the previous literature.
    Date: 2011
  7. By: Yukinobu Kitamura; Takeshi Miyazaki
    Date: 2010–08
  8. By: Stamatiadis, Filippos; Eriotis, Nikolaos
    Abstract: Purpose – In an attempt to promote efficiency, effectiveness and economy in health service production, the Greek government imposed in 2003 an accrual basis financial and cost accounting system in all public hospitals of the National Health System (NHS). The purpose of this study is not to investigate thoroughly the accounting reform implementation and adoption in specific organizations, but rather to obtain an overall idea of the reform adoption process in Greek public hospitals by identifying major areas of non-compliance with the mandatory legislative accounting framework and various organisational contingencies that influence the level of reform adoption within a broad institutional framework. Design/methodology/approach – Our analysis is based on the results of an empirical survey that took place during 2009. For the purposes of this survey, a compliance index is constructed and applied on a sample of 94 Greek public hospitals using a structured questionnaire and semi-structured interviews with six public hospital Financial and Accounting executives. Findings – The empirical evidence reveals that the level of accrual basis financial and especially cost accounting adoption in Greek public hospitals is realized only to a limited extent. In particular, results show that the relationship between the institutional isomorphic pressures and accounting reform implementation process is restricted by organizational capability factors (i.e., the quality of existing Information Technology systems, the education level of finance and accounting staff, the extent of reform related training, and the professional support of consultants). Research limitations/implications – Although this study takes into consideration the work of previous researchers in the health care area, it acknowledges that empirical research on the subject in the Greek environment is limited. Therefore this study should be viewed as an initial step to address this limitation. Originality/value – This study draws on the information systems change, management accounting innovation, and public sector reform literatures to contribute to the current knowledge in public sector accounting by examining a number of factors that are expected to influence the implementation and adoption process of accrual and cost accounting practises in the Greek public healthcare sector within a broad institutional framework. Contribution - This study contributes to the international literature of New Public Management (NPM) initiatives in public health sector by providing, to our knowledge, the first large cross-sectional assessment of accrual accounting reform adoption and implementation in Greek public hospitals. Additionally, the empirical evidence of this study can enhance researchers’ and managers’ understanding of major implementation processes and challenges and thus help them refine models of effective implementation process and improve systems and processes on similar future projects.
    Keywords: Accrual Accounting; Public Sector Accounting; Compliance Index; Public Hospitals; Isomorphism.
    JEL: M41
    Date: 2011–01–31
  9. By: Alan J. Auerbach; Michael P. Devereux
    Abstract: We model the effects of consumption-type taxes which differ according to the base and location of the tax. Our model incorporates a monopolist producing and selling in two countries with three sources of rent, each in a different location: a fixed factor (located with production), mobile managerial skill, and a monopoly mark-up (located with consumption). In the general case, we show that for national governments, there are tradeoffs in choosing between alternative taxes. In particular, a cash-flow tax on a source basis creates welfare-impairing distortions to production and consumption, but is incident on the owners of domestic production who may be non-resident. By contrast, a destination-based cash-flow tax does not distort behavior, but is incident only on domestic residents. In the alternative case of perfect competition, with the returns to the fixed factor accruing to domestic residents, the only distortion from the source-based tax is through the allocation of the mobile managerial skill. In this case, the sourcebased tax is also incident only on domestic residents, and is dominated by an equivalent tax on a destination basis, or by a sales tax.
    Date: 2010–05
  10. By: Carola Frydman; Raven S. Molloy
    Abstract: The trends in executive pay and labor income tax rates since the 1940s suggest a high elasticity of taxable income with respect to tax policy. By contrast, the level and structure of executive compensation have been largely unresponsive to tax incentives since the 1980s. However, the relative tax advantage of different forms of pay was small during this period. Using a sample of top executives in large firms from 1946 to 2005, we also find a small short run response of salaries, qualified stock options, and bonuses paid after retirement to changes in tax rates on labor income—even though tax rates were significantly higher and more heterogeneous across individuals in the first several decades following WWII. We explore several potential explanations for the conflicting impressions given by the long-run and short-run correlations between taxes and pay, including changes in social norms and concerns about pay equality.
    JEL: G30 H24 H32 J31 J33 N32
    Date: 2011–02
  11. By: Ralph Bayer; Frank A Cowell
    Abstract: Firms are usually better informed than tax authorities about market conditions and thepotential profits of competitors. They may try to exploit this situation by underreportingtheir own taxable profits. The tax authority could offset firms' informationaladvantage by adopting "smarter" audit policies .that take into account the relationshipbetween a firm's reported profits and reports for the industry as a whole. Such anaudit policy will create an externality for the decision makers in the industry and thisexternality can be expected to affect not only firms' reporting policies but also theirmarket decisions. If public policy takes into account wider economic issues than justrevenue raising what is the appropriate way for a tax authority to run such an auditpolicy? We develop some clear policy rules in a standard model of an industry andshow the effect of these rules using simulations.ca3
    Keywords: Tax compliance, evasion, oligopoly
    JEL: H20 H21
    Date: 2010–09
  12. By: Tonin, Mirco (University of Southampton)
    Abstract: The enforcement of compliance with tax regulation is a complex task. This is particularly the case when the administrative capacity of the tax authority is low, as it often happens in developing and transition countries. This paper draws on some international experiences in fighting tax evasion to identify tools that can be used to reduce underreporting by employed labor, small and medium enterprises, self-employed, and professionals. In particular, I analyze the use of minimum thresholds, where taxpayers cannot declare an income below a certain amount or, alternatively, are subject to a higher probability of an audit if they decide to do so. First, I model the impact of minimum thresholds by explicitly taking into account low administrative capacity. The model shows that introducing a threshold creates a spike and a "missing middle" in the distribution of declared incomes and highlights under which conditions a threshold is likely to increase net revenues. I then analyze two policies used to fight underreporting: the Italian "Business Sector Analysis" and the Bulgarian "Minimum Social Insurance Thresholds". The Italian tax authority infers "normal" revenues and compensations by small and medium enterprises, self-employed, and professionals from indicators that are difficult to conceal or manipulate. In case the taxpayer decides to declare less than the "normal" level, the probability of an audit increases and the burden of proof is reversed. Bulgaria has established a system of differentiated minimum social insurance thresholds depending on sector and profession, so that social security contributions cannot be lower than the ones implied by the threshold. To conclude, I appraise the applicability of these two systems in other countries.
    Keywords: tax evasion, minimum threshold, studi di settore
    JEL: H26 K35 K42 P37
    Date: 2011–02

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