nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2012‒02‒27
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The Interdependence Between Audit Market Structure and the Quality of Financial Reporting: The Case of Non-Audit Services By Christopher Bleibtreu; Ulrike Stefani
  2. Effect of corporate income tax and firms’ size on investment: evidence by Karachi stock exchange By Raza, Syed Ali; Ali, Syed Adeel; Abassi, Zia
  3. Dividend taxes and decisions of MNEs: Evidence from a Finnish tax reform By Seppo Kari; Jarkko Harju
  4. Tax competition among local governments: evidence from a property tax reform in Finland By Teemu Lyytikäinen
  5. What’s the Tax Advantage of 401(k)s? By Alicia H. Munnell; Laura Quinby; Anthony Webb
  6. Razvoj poreza na dohodak u Hrvatskoj: reforme i promašaji By Hrvoje Šimović
  7. A New Fiscal Pact, Tax Policy Changes and Income Inequality By Giovanni Andrea Cornia; Juan Carlos Gómez-Sabaini; Bruno Martorano
  8. The Finnish payroll tax cut experiment revisited By Ossi Korkeamäki
  9. A note resolving the debate on “The weighted average cost of capital is not quite right” By Keef, Stephen P; Khaled, Mohammed S; Roush, Melvin L

  1. By: Christopher Bleibtreu (Department of Economics, University of Konstanz, Germany); Ulrike Stefani (Department of Economics, University of Konstanz, Germany)
    Abstract: Recently, the Commission of the European Communities has put up for discussion various reform proposals intended to enhance the reliability of audits and to re-establish trust in the financial market. In particular, the EU Commission seeks to strengthen auditor independence and to decrease the high level of audit market concentration. Using the example of a ban on the joint provision of audit and non-audit services, we show that strengthening auditor independence and reducing market concentration may represent competing goals. Neglecting such interdependencies in the debate on regulation could thus lead to ill-advised regulatory decisions. Our arguments are based on a model that integrates a strategic auditor-manager game into a circular market matching model. We show that prohibiting general consulting services can result in a decrease in the equilibrium number of audit firms (i.e., in an increase in market concentration). Moreover, a ban on the joint supply of general consulting services might even have negative effects on the quality of audited financial statements, since the average probability that managers will misreport increases. Our model predicts the opposite effects for a prohibition on audit-related consulting services that managers purchase in order to tempt auditors to compromise their independence. The effects of a ban on “single-provider” auditing and consulting thus depend on the kind of services an auditor is allowed to offer and, in particular, on the point in time at which consulting services are negotiated.
    Keywords: Auditing, Non-Audit Services, Audit Market Concentration, Auditor Independence, Quality of Audited Financial Statements
    JEL: D43 L11 M42
    Date: 2012–02–13
  2. By: Raza, Syed Ali; Ali, Syed Adeel; Abassi, Zia
    Abstract: This study investigates to explore the effect of Corporate Income Tax and Firms’ Size on Capital Investment made in tangible assets by the Manufacturing firms belongs to nine non-financial sectors listed in Karachi Stock Exchange. To examine the study Panel financial Data on annual basis has been gathered for the period of six years from 65 sample manufacturing companies. To determine the effect of two predictors as Corporate income tax and Firms’ Size on Fixed investment the results are generated by using multiple regression analysis as a statistical technique with the help of multiple Statistical tools for high accuracy of outcomes. The results conclude that there is a negative relationship exists between corporate income tax and investment while firm size and investment reveals a positive relationship with each other. Therefore, it has been cleared in the light of above results that excess tax obligations in a firm specific sector will discourage corporate investor for investment in it. On the other hand enhancement in firm size as total sales revenue will increase the level of investment in a KSE listed firm and vice versa for developed hypothesis.
    Keywords: Corporate income tax; Firms’ size; Capital investment; Statistical analysis system
    JEL: E62 J21
    Date: 2011–09–12
  3. By: Seppo Kari; Jarkko Harju
    Abstract: We explore how a firm-level tax on redistributed foreign profits affects the choices of a multinational enterprise (MNE) using evidence from a recent tax reform in Finland. The so-called equalization tax (EQT) used to be a regular element of European imputation systems, designed to ensure that dividends were not paid out of un-taxed profits. Theoretical analyses have suggested that EQT may distort several choices of MNEs. We find a 23 per cent increase in dividend payments and a similar increase in repatriated foreign profits after the repeal of EQT. The reported profits of foreign subsidiaries of Finnish MNEs also increased, which indicates an effect on profit shifting. No change in investment was detected.
    Keywords: Dividend taxation, financial decisions, multinational enterprise, tax reform
    JEL: H32 F23 H25
    Date: 2011–10–12
  4. By: Teemu Lyytikäinen
    Abstract: This paper uses a Finnish policy intervention to study tax competition among local governments. Changes in the statutory lower limits to the property tax rates are used as a source of exogenous variation to estimate the responses of municipalities to tax rates in their neighbouring municipalities. I do not find evidence of interdependence in property tax rates among Finnish municipalities. The results are in contrast to the earlier empirical literature, using data from other countries, that has mainly found positive interdependence in tax rates. I compare the causal estimates based on the policy change to the commonly used Spatial Lag estimates and Spatial Instrumental Variables estimates, which are based on highly restrictive assumptions. The comparisons suggest that the standard spatial econometrics methods may have a tendency to overestimate the degree of interdependence in tax rates.
    Keywords: Property tax, tax competition, fiscal interaction, instrumental variables, spatial econometrics
    JEL: H71 H20 H77
    Date: 2011–08–31
  5. By: Alicia H. Munnell; Laura Quinby; Anthony Webb
    Abstract: Tax reform is high on the nation’s agenda. While Re­publicans and Democrats may disagree about the ex­tent to which tax increases should be part of the defi­cit reduction effort, they generally agree that a broader base and lower rates for the federal income tax would promote fairness and boost economic growth. The base-broadening discussion inevitably raises the question of cutting back on some “tax expenditures.” These expenditures are revenue losses attributable to provisions of the tax laws that are designed to support particular activities. Prime examples are the provi­sions designed to encourage retirement savings. It seems like a good time to understand the nature of these expenditures, determine how the revenue losses are calculated, think about how tax reform could affect the value of these provisions, and speculate how changes might affect participation and contributions in tax-advantaged savings vehicles, particularly 401(k) plans. The discussion proceeds as follows. The first section provides a brief overview of the role of taxes in the evolution of employer-sponsored retirement plans. The second section describes the tax advantage associated with 401(k) plans. The third section dis­cusses the magnitude of the 401(k) tax expenditure. The fourth section highlights how the size of the tax expenditure depends on the tax treatment of capital income outside of 401(k)s. The fifth section discusses the potential impact of proposals to cut back on the 401(k) tax expenditure. The final section concludes that while some reform proposals may make the 401(k) tax expenditure more equitable, policymakers should proceed with caution because the employer-based retirement system is the main savings vehicle for American workers.
    Date: 2012–02
  6. By: Hrvoje Šimović
    Abstract: The paper examines the development and effectiveness of the changes in Croatian personal income tax (PIT). Firstly, the paper analyzes the changes in the tax base and the nominal tax burden according to the sources of income for the period since 1994. when the comprehensive PIT was introduced till the end of year 2010. The second part contains the empirical research for the period since 2001 by 2010, where the average and effective tax burden according to the sources of income is analyzed, the effectiveness of changes in the PIT is tested, as well as the integration of the certain sources of income in PIT system. The survey results indicate a lock of consistency in the PIT development, the tax burden is unequally allocated among the observed sources of income as their lack of integration in the PIT system. Moreover, the findings presented in the paper raise the question of the comprehensive PIT existence because of the fact that the existing PIT system is almost completely based on the taxation of the employment as the only source of income.
    Keywords: H24, H21, H27
    Date: 2012–02–18
  7. By: Giovanni Andrea Cornia (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Juan Carlos Gómez-Sabaini; Bruno Martorano
    Abstract: The paper analyses the changes in tax policy, tax/GDP ratios, tax incidence and income inequality which have taken place in Latin America during the last decade against the background of the changes observed in these variables during the liberal years of the 1980s and 1990s. The paper argues that the recent tax policy changes and a favourable external environment led to an increase of about three points in the regional tax/GDP ratio, that such increase in taxation took place in a slightly or substantially more progressive way than in the past, that the Gini coefficient of the distribution of household income improved on average by 0.4-0.8 points, and that, as a result, redistribution via taxation improved (especially in the Southern Cone) in relation to the 1990s thanks to greater reliance on direct taxes and a reduction in excises. However, in the mid-late 2000s taxation remains unequalizing in about a third of the countries of the region, especially in Central America. The paper concludes by offering recommendations on how the new fiscal pact evolving in the region can be strengthened to improve the redistributive effect of taxation in the years ahead.
    Keywords: tax policy, tax incidence, income inequality, redistribution, fiscal exchange, Latin America
    JEL: D31 D70 H20
    Date: 2012
  8. By: Ossi Korkeamäki
    Abstract: In this paper I evaluate the effects of a regional experiment that reduced payroll taxes by 3?6 percentage points of the firms? wage sum in northern and eastern Finland. I estimate the effect of the payroll tax reduction on firms? employment levels, wage sum and profits, and on workers? hourly pay and monthly hours worked, by comparing the changes in employment and wages before and after the start of the experiment to a control region. My results indicate that the reduction in payroll taxes did not lead to any unequivocal aggregate effects in the target region.
    Keywords: Payroll-tax, labour demand, tax incidence
    JEL: J18 J58 J38 J68 J23 J65
    Date: 2011–04–13
  9. By: Keef, Stephen P; Khaled, Mohammed S; Roush, Melvin L
    Abstract: Miller (2009a) derives a weighted average cost of capital for the special case where the cash flows to equity and the cashflows to debt are annuities. The paper attracts debate. We show that the weighted average cost of capital is redundant in a world where interest paid is not tax deductible. The required rate of return on unlevered equity will consistently and reliably estimate the net present value of any project no matter the idiocyncratic beliefs of the analyst as to the year-by-year leverage of the project, or of the firm. We recommend that the weighted average cost of capital method is discarded. Our recommendation also applies to a world where interest paid is tax deductible.
    Keywords: WACC, finite life, discount rate, net present value, leverage,
    Date: 2012–01–10

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