nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2011‒10‒09
twelve papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Measuring the burden of the corporate income tax under imperfect competition By Li Liu; Rosanne Altshuler
  2. National measures to counter tax avoidance under the Merger Directive By Joachim Englisch
  3. Income Taxation and the Choice of the Tax Rate Schedule: Sacrifice Principles and "Just" Tax Rates By Hans-Georg Petersen
  4. Tax Rate and Tax Base Competition for Foreign Direct Investment By Peter Egger; Horst Raff
  5. Western METRics: Marginal Effective Tax Rates in the Western Provinces By Alexandre Laurin; Finn Poschmann
  6. Carbon Taxation in the EU: Expanding EU Carbon Price By David A. Weisbach
  7. Economic integration and the optimal corporate tax structure with heterogeneous firms By Christian Bauer; Ronald B. Davies; Andreas Haufler
  8. Do Cheaters Bunch Together? Profit Taxes, Withholding Rates and Tax Evasion By Paul E. Carrillo; M. Shahe Emran; Anita Rivadeneira
  9. Extended dividend, cash flow and residual income valuation models: Accounting for deviations from ideal conditions By Heinrichs, Nicolas; Hess, Dieter; Homburg, Carsten; Lorenz, Michael; Sievers, Soenke
  10. Closer to an internal market? The economic effects of EU tax jurisprudence By Clemens Fuest; Rita de la Feria
  11. EU perspective on VAT exemptions By Joachim Englisch
  12. The impact of turning a tax reduction into a tax credit to subsidize in-home services: an evaluation of the 2007 reform in France By C. MARBOT; D. ROY

  1. By: Li Liu (Centre for Business Taxation, University of Oxford); Rosanne Altshuler (Department of Economics, Rutgers University)
    Abstract: We model and estimate the incidence of the corporate income tax under imperfect competition. Identification comes from variation in effective marginal tax rates in the United States across industries and time. Our empirical results suggest that labor bears a significant portion of the burden of the corporate income tax. In addition, we find that the elasticity of wages with respect to the corporate marginal effective tax rate increases with industry concentration. Over all industries, our estimates suggest that a one dollar increase in corporate tax revenue decreases wages by around 60 cents.
    Keywords: Tax incidence, Wage determination, Corporate income tax, Market structure
    JEL: H22 H25 H31
    Date: 2011
  2. By: Joachim Englisch (University of Muenster)
    Abstract: Taxation inevitably gives rise to tax planning. In the era of globalization, multinationals in particular may not only try to exploit options, inconsistencies and gaps in domestic tax legislation, but they will also (re-)organize their business so as to make an optimal use of international tax sheltering opportunities. In order to curb ‘aggressive’ tax arbitrage, all developed jurisdictions rely on targeted anti-avoidance provisions. In addition, most tax systems will have recourse to a statutory general anti-avoidance rule (GAAR) or judge-made anti-avoidance doctrine to that effect; by contrast, the UK tax system relies on extensive purposive construction to thwart tax saving schemes that are based on an overly literal or technical interpretation of the tax statues. Under either approach, the most difficult task for tax administrations and courts is to draw as bright a line as possible between legitimate tax mitigation and unacceptable tax avoidance schemes. In areas of taxation that are harmonized by EU law, the issue becomes even more complex due to the influence of the ECJ doctrine of prohibition of abuse of (tax) law. This working paper deals with the anti-avoidance clause of Art. 15 of the EU Merger Directive, which is considered to be the most refined reflection of that doctrine in direct tax law. The paper first examines the Union law concept of tax avoidance in general, and under the Merger Directive in particular. The corresponding sections critically analyze the doctrinal approach of the ECJ; they also discuss key criteria and structural features that are relevant in the context of any kind of GAAR in order to distinguish it from mere purposive construction and to establish a dividing line to acceptable tax planning. Second, the paper highlights the implications of Art. 15 Merger Directive with respect to national anti-avoidance rules or doctrines that apply to cross-border reorganizational operations. A possible direct effect and mandatory nature of these and other ‘anti-tax abuse’-provisions of EU law will be discussed, as well as questions of burden of proof and the admissibility of legal presumptions of tax avoidance.
    Date: 2011
  3. By: Hans-Georg Petersen
    Abstract: In the history of economic thoughts the problem of a "just" tax rate structure has played an important role. The paper reconsiders the discussions of the last two centuries and sheds additional light on the concrete tax schedules using the more recent methods of tax theory. Even if the substitution effects which play an important role in the theory of optimal taxation are neglected, the slope in the diminishing marginal utility of income causes tax rate structures reaching from accelerated progression to delayed regression. Interestingly the principle of equal relative sacrifice combined with a Bernoulli utility function yields a delayed progression, which is connected with a negative income tax.
    Keywords: income tax, sacrifice principle, tax rate schedule, cardinal utility function
    JEL: H21 H24 D31 B13
    Date: 2011–06
  4. By: Peter Egger; Horst Raff
    Abstract: This paper argues that the large reduction in corporate tax rates and only gradual widening of tax bases in many countries over the last decades are consistent with tougher international competition for foreign direct investment (FDI). To make this point we develop a model in which governments compete for FDI using corporate tax rates and tax bases. The model’s predictions regarding the slope of policy reaction functions and the response of equilibrium tax parameters to trade costs and market size are shown to be consistent with panel data for 43 developed countries and emerging markets. Using estimated policy reaction functions we simulate the effect of regional trade integration and find that this integration has contributed significantly to the observed fall in corporate tax rates
    Keywords: corporate taxes; tax competition; foreign direct investment; multinational firms; free-trade areas; regional integration
    JEL: F15 F23 H20 H25
    Date: 2011–09
  5. By: Alexandre Laurin (C.D. Howe Institute); Finn Poschmann (C.D. Howe Institute)
    Abstract: What impact do the tax systems of Canada’s Western provinces have on families’take-home pay and seniors’ pension income, and how does it compare to other provinces? This report answers the question by looking at marginal effective tax rates (METRs) on personal income, which measure the impact of federal and provincial income taxes combined with reductions and clawbacks of income-tested tax credits and benefits.
    Keywords: Fiscal and Tax Competitiveness, marginal effective tax rates (METRs), Canada, Canadian western provinces
    JEL: E52 E61 E64
    Date: 2011–08
  6. By: David A. Weisbach (University of Chicago)
    Abstract: The current pricing mechanism for carbon in the EU, the EU emissions trading system, only covers 40 percent of emissions. Carbon taxation currently plays no role. The Commission has recently proposed to revise the energy tax system in the EU to include a carbon tax component. This paper evaluates the Commission proposal and considers the possible expansion of the EU carbon pricing base either by expanding emissions trading to cover more sectors or by enacting a carbon tax. It concludes that there are strong arguments for expanding the carbon pricing base, as suggested by the Commission. Nevertheless, expanding the base should done through a unified system, such as expanding the coverage of the emissions trading system or enacting an economywide carbon tax rather than through having side-by-side taxes and trading, as in the Commission proposal.
    Keywords: Carbon Tax
    Date: 2011
  7. By: Christian Bauer (University of Munich); Ronald B. Davies (University College Dublin); Andreas Haufler (University of Munich)
    Abstract: We study the optimal combination of corporate tax rate and tax base in a model of a small open economy with heterogeneous firms. We show that it is optimal for the small country's government to effectively subsidize capital inputs by granting a tax allowance in excess of the true costs of capital. Economic integration reduces the optimal capital subsidy and drives low-productivity firms from the small country's home market, replacing them with high-productivity exporters from abroad. This endogenous policy response creates a selection effect that increases the average productivity of home firms when trade barriers fall, in addition to the well-known direct effects.
    Keywords: corporate tax reform, trade liberalization, firm heterogeneity
    JEL: H25 H87 F15
    Date: 2011
  8. By: Paul E. Carrillo (Department of Economics/Institute for International Economic Policy, George Washington University); M. Shahe Emran (Department of Economics/Institute for International Economic Policy, George Washington University and IPD, Columbia University); Anita Rivadeneira (Centro de Estudios Fiscales, Servicio de Rentas Internas – Ecuador)
    Abstract: We use firm-level administrative data from Ecuador to study the implications of 'reverse withholding' for firms' tax behavior. Withholding does not affect tax liability of firms, but it may result in a discontinuity in the audit probability around the withholding threshold. Exploiting variation in withholding rates across industries and over time, we find that firms' profit taxes concentrate near the withholding rate. To explore the link between bunching and evasion, we use data from third party reports on sales and costs. We show that the firms that bunch are more likely to conceal their sales and inflate their costs. Finally, we create a profile of the firms that bunch and of their general managers: medium size firms in the coastal region headed by single males are significantly more likely to bunch and, presumably, to evade taxes.
    Keywords: Withholding, Reverse Withholding, Firms, Profit Tax, Bunching, Tax Evasion, Ecuador
    JEL: H25 H26 O23 O12
    Date: 2011–03
  9. By: Heinrichs, Nicolas; Hess, Dieter; Homburg, Carsten; Lorenz, Michael; Sievers, Soenke
    Abstract: Standard equity valuation approaches (i.e., DDM, RIM, and DCF model) are derived under the assumption of ideal conditions, such as infinite payoffs and clean surplus accounting. Because these conditions are hardly ever met, we extend the standard approaches, based on the fundamental principle of financial statement articulation. The extended models are then tested empirically by employing two sets of forecasts: (1) analyst forecasts provided by Value Line and (2) forecasts generated by cross-sectional regression models. The main result is that our extended models yield considerably smaller valuation errors. Moreover, by construction, identical value estimates are obtained across the extended models. By reestablishing empirical equivalence under non-ideal conditions, our approach provides a benchmark that enables us to quantify the errors resulting from individual deviations from ideal conditions, and thus, to analyze the robustness of the standard approaches. Finally, by providing a level playing field for the different valuation approaches, our findings have implications for other empirical settings, for example, estimating the implied cost of capital. --
    Keywords: Dirty Surplus,Terminal Value,Steady-State,Valuation Error
    JEL: G12 G14 M41
    Date: 2011
  10. By: Clemens Fuest (Oxford University Centre for Business Taxation); Rita de la Feria (Oxford University Centre for Business Taxation)
    Abstract: This paper proposes a new framework to assess the impact of Court of Justice of the European Union (CJEU) jurisprudence on Internal Market-related areas, by considering whether the jurisprudence of the Court on corporate taxation fulfils the constitutional mandate, as set-out in the European Treaties, of establishing such a market. It is shown that the Court’s focus upon removing discriminatory obstacles to the fundamental freedoms does not necessarily lead to a more level playing field and increased tax neutrality, an instrumental objective towards attaining a European Internal Market. In order to assess whether the jurisprudence of the Court does indeed attain increased neutrality or level playing field, two rulings are used as case studies. The first ruling in Lankhorst-Hohorst regards the compatibility of thin capitalisation with free movement provisions; the second in Marks & Spencer concerns the compatibility of rules on group consolidation with those same provisions. An economic analysis demonstrates that, depending on the reaction of Member States to the ruling, tax induced differences in capital costs faced by firms operating within the European Internal Market may increase, whilst GDP and welfare may decrease. Consideration of actual legislative amendments introduced to thin capitalisation rules by Member States following Lankhorst-Hohorst, and to group consolidation rules following Marks & Spencer, appear to indicate that it is this negative scenario which has prevailed. Results demonstrate that it is not always or necessarily the case that decisions of the CJEU will led to an increased level playing field and tax neutrality, thus contributing to the establishing of the EU Internal Market. The paper considers the constitutional implications of this conclusion, and the consequent breaking of the constitutional instrumental chain. In particular, it reflects on whether the Court’s actions can be regarded as ultra vires, and whether they may constitute a violation of the rule of law and the principle of separation of powers. It concludes that the Court’s lack of consideration of the constitutional instrumental chain might mean that we are heading in the wrong direction.
    Date: 2011
  11. By: Joachim Englisch (University of Muenster)
    Abstract: As VAT becomes an increasingly important source of tax revenue world-wide, tax policy makers should be well aware of its strengths and weaknesses. In academia, there is strong consensus that tax exemptions rank among the most problematic features of VAT. The very concept of exemption is already a misrepresentation, because it normally entails the loss of entitlement to an input VAT credit; exempt supplies are therefore actually “input-taxed”. It is generally accepted that this particular form of occult taxation detrimentally affects economic efficiency and increases administrative complexity. Moreover, VAT as an indirect and impersonal tax on consumption is intended to be borne by final consumers but it is imposed on business. It will therefore often be questionable who really benefits from the intended relief, and whether there are superior alternatives to VAT exemptions to attain their underlying policy objectives. Even where they can be defended, exemptions are often implemented in an inconsistent fashion. All of these aspects are particularly troublesome in the EU VAT system that suffers from legislative eurosclerosis. The present paper discusses these topics with special emphasis on the EU constitutional and institutional framework. It offers an overview of the current array of exemptions and lays out the relevant economic and legal benchmark for their critical assessment. The paper identifies eight main rationales for tax exemptions and analyzes their merits in the light of those benchmarks. Particular attention is given to considerations of tax equity and social policy, and to exemptions of so-called “hard to tax”-supplies. In a separate section, the paper discusses the detrimental effects of the corresponding denial of input VAT deduction and its eventual justifications. Policy makers are thus provided with clear legal guidance as to which exemptions are required, which are tolerable, and which should be abolished within the framework of EU VAT, and how the defendable ones should be amended.
    Date: 2011
  12. By: C. MARBOT (Insee); D. ROY (Insee)
    Abstract: Since 1991, French taxpayers who employ someone to work at their home (for care, cleaning, etc.) can deduct 50 % of the employment cost from their income tax. In 2007, the tax reduction was turned into a tax credit, making lower income households eligible. However, this change was limited to economically active home employers, which narrowed the scope of the reform. To measure its impact, we use exhaustive tax data, built into a panel covering the 2006-2008 period. First, we study the changes in the amounts refunded, in the number and in the characteristics of home employers. In 2008, households spent 7.8 billion euros on in-home services. 2.6 billion were refunded to them in tax reduction, only 151 million in actual tax credit. Among home employers that did not benefit from the tax reduction scheme in 2006, only 14% later became recipients of the tax credit. This is because the requirement to be economically active excludes the elderly, who make up most of the less well-off home employers. Next, we try to measure the causal change in the consumption of in-home services attributable to the new tax credit. Depending on the definition of the incentive, between 15 % and 25 % of households are impacted. Combining matching and difference-in-difference estimates, we find a significant increase both in the number of home employers and in their expenditure.
    Keywords: Tax credit, home employers, in-home services, tax incentives, policy evaluation, matching, difference-in-difference estimates
    JEL: D13 H23 H31
    Date: 2011

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