nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2023‒07‒24
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. A Welfare Analysis of Tax Audits Across the Income Distribution By William C. Boning; Nathaniel Hendren; Ben Sprung-Keyser; Ellen Stuart
  2. How does corporate taxation affect business investment?: Evidence from aggregate and firm-level data By Tibor Hanappi; Valentine Millot; Sébastien Turban
  3. The role of the financial auditor for the participation of forestry enterprises in global value chains By Georgieva, Daniela; Bankova, Diyana
  4. The emerging governance system for the Moroccan insurance sector By Chaymaa Reghay; Otheman Nouisser; Said Radi
  5. Tax Withholding and the Size of Government By Sutirtha Bagchi; Libor Dušek
  6. The potential impact of broader central clearing on dealer balance sheet capacity: a case study of UK gilt and gilt repo markets By Baranova, Yuliya; Holbrook, Eleanor; MacDonald, David; Rawstorne, William; Vause, Nicholas; Waddington, Georgia
  7. How to Design a Presumptive Income Tax for Micro and Small Enterprises By Jean-François Wen
  8. Costa Rica: Technical Assistance Report-Sovereign Asset and Liability Management—Scoping Mission By International Monetary Fund
  9. The Taxation of Couples By Felix J. Bierbrauer; Pierre C. Boyer; Andreas Peichl; Daniel Weishaar

  1. By: William C. Boning; Nathaniel Hendren; Ben Sprung-Keyser; Ellen Stuart
    Abstract: We estimate the returns to IRS audits of taxpayers across the income distribution. We find an additional $1 spent auditing taxpayers above the 90th income percentile yields more than $12 in revenue, while audits of below-median income taxpayers yield $5. We draw upon comprehensive internal accounting information and audit-level enforcement logs to quantify the average costs and revenues associated with each audit. We begin by estimating the average initial return to all audits of US taxpayers filing in 2010-2014. On average, $1 in audit spending raises $2.17 in initial revenue. Audits of high-income taxpayers are more costly, but the additional revenue raised more than offsets the costs. Audits of the 99-99.9th percentile have a 3.2:1 return; audits of the top 0.1% return 6.3:1. We then exploit the 40% audit reduction between tax years 2010 and 2014 to examine the returns to marginal audits. We find they exceed the returns to average audits. Revenues remain relatively unchanged but marginal costs fall below average costs due to economies of scale. Next, we use randomly selected audits to examine the impact of an initial audit on future revenue. This specific deterrence effect produces at least three times more revenue than the initial audit. Deterrence effects are relatively consistent across the income distribution. This results in the 12:1 return above the 90th percentile. We conclude by estimating the welfare consequences of audits using the MVPF framework and comparing audits to other revenue raising policies. We find that audits raise revenue at lower welfare cost.
    JEL: H0
    Date: 2023–06
  2. By: Tibor Hanappi; Valentine Millot; Sébastien Turban
    Abstract: Business investment in OECD countries has remained weak, in particular since the 2008 global financial crisis. At the same time, the cost of capital has significantly and steadily decreased over the last thirty years, reflecting a fall in both interest rates and corporate tax rates. This raises the question of whether business investment still responds to the cost of capital and thus whether corporate tax policy can support investment. This paper analyses trends in business investment and in the cost of capital in OECD countries over the past three decades. Then, it investigates empirically the sensitivity of business investment to corporate taxation, and how this sensitivity varies across firm, investment and tax-design characteristics. Panel regressions at the firm and industry levels confirm that business investment rates are negatively related to corporate taxation, measured by country-level forward-looking effective tax rates. However, the tax sensitivity of business investment has fallen significantly since the global financial crisis. It also differs significantly across firms, assets, and corporate tax design characteristics. Overall, the estimation results suggest that a nuanced and granular approach to corporate tax policy, accounting for heterogeneity in tax sensitivity, is needed to support investment effectively. The paper discusses possible policy options, including the reduction of non-profit taxes, the use of targeted corporate income tax instruments, and the use of more generous capital allowances where they may induce strong investment responses.
    Keywords: capital allowances, corporate taxation, fiscal policy, investment, non-profit taxes
    JEL: D22 D24 E22 E62 H25 H32
    Date: 2023–07–19
  3. By: Georgieva, Daniela; Bankova, Diyana
    Abstract: The independent external financial audit is of fundamental importance in the management of any sector, including forestry. Economic theories argue that evidence from external sources is considered more reliable. In addition, external financial auditors have an important role in terms of the strategic development of the entity, the disclosure of data in the financial statements, and managerial decisions. However, the forestry sector in Bulgaria is very conservative and closed to effective collaboration with foreign partners. In this respect, the financial auditors can have an important role as a factor for forestry enterprises' participation in global value chains (GVC). The paper‘s main goal is to outline the role of external financial auditors in the participation of Bulgarian forestry enterprises in GVCs. For this purpose, the authors present summarized data from interviews conducted with representatives of the financial audit sector in the Republic of Bulgaria. In conclusion, it can be stated that auditors do not have the right to influence management decisions and processes related to GVCs, but at the same time, part of the analysis of risk factors such as foreign suppliers and customers are taken into account by the management who directly or indirectly relays on auditors’ opinions and even seeks consultations and advice from them. In addition, based on the procedures the financial auditors perform, they analyze and evaluate the business as a whole, with which they consciously or unconsciously evaluate the influence of global chains on the activities of their clients
    Keywords: external auditor, forestry, global value chains
    JEL: M42
    Date: 2023
  4. By: Chaymaa Reghay (laboratoire de recherche en sciences de gestion des organisations - ENCG Kenitra); Otheman Nouisser (laboratoire de recherche en sciences de gestion des organisations - ENCG Kenitra); Said Radi (Autorité de Contrôle des Assurances et de la Prévoyance Sociale)
    Abstract: Following the example of the European regulatory reform Solvency II, the Moroccan insurance sector has been engaged for a few years in a large-scale project called "Risk-Based Solvency". From now on, it takes a new turn since it becomes topical; for good reason: it represents a real challenge in particular in comparison with the current prudential framework, until then in force. The project, which was drawn up in 2017 and is due to be implemented in 2025, is preparing the sector for a major change in its regulation. For the time being, the implementation work is still in progress and the new circular is practically stabilized. Three sets of regulatory requirements will be introduced: quantitative, qualitative and financial reporting. In this paper, we will focus on the second set of requirements, which concerns the organization of insurance and reinsurance undertakings (EAR) and aims at the implementation of four key functions: risk management, audit, compliance and actuarial; in this case the internal risk and solvency assessment (ORSA). The implementation of these regulatory requirements should enable companies to ensure that they are well managed, sufficiently capitalized and able to justify their solvency at any time. This article is a systematic literature review. The objective is to provide a theoretical contribution to this subject in the form of a presentation of the new qualitative aspects of the directive, firstly by providing an overview of Pillar 2 and then by analyzing the interdependence of the key functions relating to risk management and compliance.
    Abstract: À l'instar de la réforme réglementaire européenne Solvabilité II, le secteur marocain des assurances a entamé depuis quelques années un projet d'envergure dit « Solvabilité Basée sur les Risques ». Désormais, il prend une nouvelle tournure puisqu'il devient d'actualité ; pour cause : il représente un réel défi notamment en comparaison avec le cadre prudentiel actuel, jusqu'alors en vigueur. Ce projet, élaboré en 2017 et dont la mise en œuvre effective est prévue pour 2025, prépare le secteur à un changement majeur au niveau de sa réglementation. Pour l'heure, les travaux de mise en place poursuivent leur cheminement et la nouvelle circulaire est pratiquement stabilisée. Trois séries d'exigences réglementaires seront introduites : quantitatives, qualitatives et communication financière. Dans ce papier, nous allons porter un regard sur la deuxième série d'exigences, qui touche à l'organisation même des entreprises d'assurances et de réassurance (EAR) et qui vise la mise en place de quatre fonctions clés : gestion des risques, audit, conformité et actuariat ; en l'occurrence l'évaluation interne des risques et de la solvabilité (ORSA). La mise en application de ces exigences réglementaires devra permettre aux entreprises de s'assurer qu'elles sont bien gérées, suffisamment capitalisées et en mesure de justifier à tout moment leur solvabilité. Cet article est une revue de littérature systématique. L'objectif est d'apporter une contribution théorique sur ce sujet sous la forme d'une présentation des nouveaux aspects qualitatifs de la directive en explicitant, dans un premier temps, une vue d'ensemble sur le Pilier 2, puis en analysant l'interdépendance des fonctions clés relatives à la gestion des risques et à la conformité.
    Keywords: Insurance, Risk-based solvency, Governance system, Key functions, Assurance, Solvabilité basée sur les risques, Système de gouvernance, Fonctions clés
    Date: 2023–06–10
  5. By: Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University); Libor Dušek (Charles University, Faculty of Law)
    Abstract: This paper examines the hypothesis that an improvement in tax collections causally leads to bigger government. We exploit the staggered introduction of withholding of the state personal income tax by U.S. states between 1948 and 1987 and find that withholding led to an increase in tax revenues by about 28 percent. We derive a theoretical model through which we interpret the estimates distinguishing between a mechanical increase in tax collections driven by reduced noncompliance, subsequent adjustments in revenue choices in response to that reduced noncompliance, and an increase in the underlying demand for revenue that may have motivated the adoption of withholding. Governments responded to the improvement in personal income tax collections by shifting the composition of revenues towards a heavier reliance on this tax. States also increased tax rates as they implemented withholding, which suggests that a need to raise more revenue was an important motive for adopting withholding.
    Keywords: Political economy of taxation; Size of government; Third-party reporting; Withholding
    JEL: H11 H21 H26 H71 N42
    Date: 2023–07
  6. By: Baranova, Yuliya (Bank of England); Holbrook, Eleanor (Bank of England); MacDonald, David (Bank of England); Rawstorne, William (Bank of England); Vause, Nicholas (Bank of England); Waddington, Georgia (Bank of England)
    Abstract: More widespread central clearing could enhance dealers’ ability to intermediate financial markets by increasing the netting of buy and sell trades, thereby reducing the impact of trading on balance sheets and capital ratios. Drawing on trade‑level regulatory data, we study the netting benefits for UK dealers if comprehensive central clearing had been introduced to the cash gilt and gilt repo markets ahead of the March 2020 dash for cash (DFC) crisis. For the gilt repo market, we estimate that the policy would have reduced the gilt repo exposures on UK dealers’ balance sheets by 40% and, hence, boosted their aggregate leverage ratio by 3 basis points. If that policy had been accompanied by standardisation of repo maturity dates, such that they fell on the same day of the week (apart from for overnight repo), the reduction in exposures would have risen to 60% and the increase in the aggregate leverage ratio to 5 basis points. Such improvements in netting rates would in principle have allowed the dealers’ repo desks to expand their trading during the DFC by 2.5 times more than under prevailing clearing rates for each incremental unit of capital available to them. For cash gilt trades, central clearing would only have reduced unsettled trade exposures for dealers using a particular accounting treatment, but would have done so by up to 80% for that group, boosting its aggregate leverage ratio by 0.4 basis points. However, changes to the computation of the Basel III leverage ratio implemented in January 2023 would also have had these effects on cash trades.
    Keywords: Central clearing; dealers; gilts; market structure; repo
    JEL: G12 G18 G23 G28
    Date: 2023–06–02
  7. By: Jean-François Wen
    Abstract: Turnover taxes are prevalent in developing countries as a simple form of presumptive taxation of business income. Such simplified tax regimes can reduce the relatively high compliance costs of micro and small enterprises, which might otherwise discourage entrepreneurs from formalizing their activities and paying taxes. The note addresses design issues for a turnover tax regime—which taxes it replaces, what the criteria are for eligibility, how to determine the optimal threshold, and how to set the tax rate. A key observation is that, although low turnover tax rates may incite larger firms to artificially reduce their sales, the rate should also not be so high as to discourage formalization of activities. A table of tax rates and turnover thresholds observed internationally is provided. The note concludes by suggesting analytical steps to guide practitioners in designing turnover tax regimes.
    Keywords: Presumptive tax; turnover tax; informal sector; microenterprises; taxpayer Compliance cost; turnover tax rate; turnover tax systems; IMF library; Sales tax; Income and capital gains taxes; Income tax systems; Corporate income tax; Effective tax rate; Africa; South America; Eastern Europe; West Africa; Western Europe
    Date: 2023–06–29
  8. By: International Monetary Fund
    Abstract: Aided by a 36–month Extended Fund Facility (EFF) in place since March 2021, Costa Rica’s reform efforts toward strong, inclusive, and sustainable growth are showing tangible results. On the public debt management side, the authorities’ commitment includes reforms of the institutional setup, strategy, and domestic market development. In parallel, efforts are underway to create a framework for a consolidated management of the state’s assets and liabilities and to reform the functioning of various building blocks of the consolidated public sector balance sheet, such as state-owned enterprises and banks.
    Date: 2023–06–15
  9. By: Felix J. Bierbrauer (Center for Macroeconomic Research, University of Cologne, Germany); Pierre C. Boyer (CREST, Ecole Polytechnique, Institut polytechnique de Paris, France); Andreas Peichl (ifo Munich, LMU Munich, CESifo, IHS and IZA); Daniel Weishaar (LMU Munich)
    Abstract: This paper studies the tax treatment of couples. We develop two different ap-proaches. One is tailored to the analysis of tax systems that stick to the principle that the tax base for couples is the sum of their incomes. One is tailored to the analysis of reforms toward individual taxation. We study the US federal income tax since the 1960s through the lens of this framework. We find that, in the recent past, realizing efficiency gains requires lowering marginal tax rates for secondary earners. We also find that revenue-neutral reforms towards individual taxation are in the interest of couples with high secondary earnings while couples with low secondary earnings are worse off. The support for such a reform recently passed the majority threshold. It is rejected, however, by a Rawlsian social welfare function. Thus, there is a tension between Rawlsian and Feminist notions of social welfare.
    Keywords: Taxation of couples; Tax reforms; Optimal taxation; Political economy; Non-linear income taxation.
    JEL: C72 D72 D82 H21
    Date: 2023–06

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