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on Public Economics |
| By: | Laurence Jacquet; Etienne Lehmann |
| Abstract: | We study the optimal tax system when taxpayers earn different kinds of income by supplying different inputs. Imperfect substitution between inputs allows for general equilibrium effects. We consider any type of cross-base responses to tax changes such as income-shifting. Formalizing the tax schedule as the sum of many one-dimensional schedules, we express optimal marginal tax rate on any kind of income in terms of sufficient statistics, including new ones for cross-base responses and general equilibrium effects. We also identify the conditions under which making the personal income tax marginally more schedular is socially desirable. The comprehensive and schedular (dual, in particular) income taxes being recurring proposals in the public debate, we derive sufficient conditions under which each form of tax is optimal. We stress how empirically restrictive these conditions are. Using a new algorithm on French tax return data, we characterize the optimal combination of a nonlinear tax schedule on personal income and a linear tax rate on capital income. We find that one should include, without any deduction, all income sources in the personal income base and subsidize the source of income which is more elastic. We find that cross-base responses have little effects on the personal nonlinear income tax schedule but increases by 5.9 to 6.9 percentage points the capital tax rate. General equilibrium effects also increases this tax rate by around 4.5 percentage points. |
| Keywords: | nonlinear income taxation, several income sources, cross-base responses, endogenous prices, dual income tax, comprehensive income tax |
| JEL: | H21 H22 H24 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9324&r= |
| By: | Johannes Becker; John D. Wilson |
| Abstract: | We consider a world in which countries apply optimal taxes on mobile capital and savings (like in Bucovetsky and Wilson, 1991). Firms and savers may underreport income in order to avoid or evade taxation. We show that, even in the presence of underreporting, the equilibrium under tax competition may still be constrained-efficient (in the sense that there is no scope for welfare enhancing tax coordination). This is the case if the marginal social costs of underreporting savings and investment income are equal. The model demonstrates that, if source-based taxes on capital are inefficiently low, as is often assumed, taxes on savings must be inefficiently high. Constrained-efficient tax policy minimizes the social cost of underreporting. The results are robust to introducing taxes on profit or on labor income, if these types of income can be underreported as well. We conclude that commonly held assumptions on the need for coordination under tax competition need to be revised or qualified. |
| Keywords: | tax competition, social welfare, tax coordination |
| JEL: | H25 H32 H87 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9318&r= |
| By: | A. BAUER (Insee); - M. ROTEMBERG (New York University) |
| Abstract: | Corporate tax codes can have notches; values where after-tax profits decrease in before-tax sales. Firms endogenously respond to notches, leading to excess mass in the firm-size distribution. We study a 1997 policy reform in which the French government implemented a transient tax reform that increased profit taxes by 15% for firms with over 50 million Francs in turnover. We use two distinct and complementary approaches to estimate the extent of tax avoidance: (a) using firms far away from (and therefore unlikely to be responsive to) the tax notch in the same year and (b) the entire firm size distribution before the tax reform. Both strategies generate similar results for the extent of tax avoidance. We show that the firms who avoid the tax are the ones with the lowest calibrated adjustment costs and those with the larger profits. The tax avoidance behavior comes mostly from increases in inventories and decreases in sales. |
| Keywords: | Business Taxes, Tax Evasion, Firm Production |
| JEL: | H25 H26 H32 D24 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:nse:doctra:g2020-10&r= |
| By: | Mascagni, Giulia; Molla, Kiflu; Mengistu, Andualem |
| Abstract: | This paper explores the relationship between tax rates and tax evasion in a low-income country context: Ethiopia. By using transaction-level administrative trade data, we are able to provide an analysis that is largely comparable with the rest of the literature while also introducing two important innovations. First, we compare the elasticity of evasion to statutory tax rates and effective tax rates (ETRs). Most studies in the literature so far focused on the former. We show that ETRs are the most relevant parameter to explain evasion in contexts where exemptions are widespread, which results in a large divergence between ETRs and the statutory rates set out in the law. Second, we account for trade costs more precisely than the previous literature by adjusting the trade gap rather than controlling for proxies. We argue that this new approach to accounting for trade costs is superior to those previously adopted in the literature. |
| Keywords: | Finance, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:16548&r= |
| By: | Teresa Ghilarducci; Aida Farmand; Bridget Fisher; Siavash Radpour (Schwartz Center for Economic Policy Analysis (SCEPA)) |
| Abstract: | A popular cash transfer program credited with lifting millions out of poverty, the Earned Income Tax Credit (EITC) also reduces wages for non-college educated workers, particularly older workers. Meanwhile, eligibility rules have long prevented most older workers from receiving EITC benefits at the same rate as their younger counterparts. Expanding EITC benefits permanently would offset some of these lost earnings and help stabilize older workers’ earnings. In 2021, Congress enacted a temporary EITC expansion—and our research shows that a permanently expanded EITC would benefit millions of older low-income workers. |
| Keywords: | Covid-19, Earned Income Tax Credit, EITC, low-income, Workers, Jobs, Unemployment, Risk, Older workers, retirement income, retirement, retirement savings |
| JEL: | E24 I14 J62 J38 E21 J83 J32 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:epa:cepapn:2021-02&r= |
| By: | Nezih Guner (CEMFI, Centro de Estudios Monetarios y Financieros); Remzi Kaygusuz (Sabancy University); Gustavo Ventura (Arizona State University) |
| Abstract: | The U.S. spends non trivially on non-medical transfers for its working-age population in a wide range of programs that support low and middle-income households. How valuable are these programs for U.S. households? Are there simpler, welfare-improving ways to transfer resources that are supported by a majority? What are the macroeconomic effects of such alternatives? We answer these questions in an equilibrium, life-cycle model with single and married households who face idiosyncratic productivity risk, in the presence of costly children and potential skill losses of females associated with non-participation. Our findings show that a potential revenue-neutral elimination of the welfare state generates large welfare losses in the aggregate. Yet, most households support eliminating current transfers since losses are concentrated among a small group. We find that a Universal Basic Income program does not improve upon the current system. If instead per-person transfers are implemented alongside a proportional tax, a Negative Income Tax experiment, there are transfer levels and associated tax rates that improve upon the current system. Providing per-person transfers to all households is quite costly, and reducing tax distortions helps to provide for additional resources to expand redistribution. |
| Keywords: | Taxes and transfers, household labor supply, income risk, negative income tax. |
| JEL: | E62 H24 H31 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2021_2107&r= |
| By: | Garcia-Bernardo, Javier; Janský, Petr |
| Abstract: | Multinational corporations (MNCs) avoid taxes by shifting their profits from countries where real activity takes place towards tax havens, depriving governments worldwide of billions of tax revenue. Earlier research investigating the scale and distribution of profit shifting has faced methodological and data challenges, both of which we address. First, we propose a logarithmic function to model the extremely non-linear relationship between the location of profits and tax rates faced by MNCs at those locations – that is, the extreme concentration of profits without corresponding economic activity in a small number of low-tax jurisdictions. We show that the logarithmic model allows for a more accurate identification of profit shifting than linear and quadratic models. Second, we apply the logarithmic model to newly available country-by-country reporting data for large MNCs – this provides information on the activities of large MNCs, including for the first time many low- and lower-middle-income countries. We estimate that MNCs shifted US$1 trillion of profits to tax havens in 2016, which implies approximately US$200-300 billion in tax revenue losses worldwide. MNCs headquartered in the United States and Bermuda are the most aggressive at shifting profits towards tax havens, while MNCs headquartered in India, China, Mexico and South Africa the least. We establish which countries gain and lose most from profit shifting: the Cayman Islands, Luxembourg, Bermuda, Hong Kong and the Netherlands are among the most important tax havens, whereas low- and lower-middle-income countries tend to lose more tax revenue relative to their total tax revenue. Our findings thus support the arguments of low- and lower-middle-income countries that they should be represented on an equal footing during international corporate tax reform debates. |
| Keywords: | Development Policy, Economic Development, Globalisation, Governance, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:16467&r= |
| By: | Hamudi, Simbarashe |
| Abstract: | Value added tax is a key tax for generating revenue in Zimbabwe and all African states, and for financing the budget in African countries. VAT revenue has an essential role in budgetary policymaking. Every year revenue authorities are not collecting large amounts of VAT for various reasons, including ineffective administration and tax evasion. This brings the question of the reform of the VAT system to the forefront. In Zimbabwe, attempts to improve VAT revenue collection have been made over several years. Hopes were pinned on the use of fiscalisation and audits of VAT refunds.1 However, traders continue to evade VAT – and this has led to the introduction of value added withholding tax to improve VAT revenue collection. |
| Keywords: | Finance, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:16729&r= |
| By: | Andre Luduvice |
| Abstract: | What are the consequences of a nationwide reform of a transfer system based on means-testing toward one of unconditional transfers? I answer this question with a quantitative model to assess the general equilibrium, inequality, and welfare effects of substituting the current US income security system with a universal basic income (UBI) policy. To do so, I develop an overlapping generations model with idiosyncratic income risk that incorporates intensive and extensive margins of the labor supply, on-the-job learning, and child-bearing costs. The tax-transfer system closely mimics the US design. I calibrate the model to the US economy and conduct counterfactual analyses that implement reforms toward a UBI. I find that an expenditure-neutral reform has moderate impacts on agents’ labor supply response but induces aggregate capital and output to grow due to larger precautionary savings. A UBI of $1,000 monthly requires a substantial increase in the tax rate of consumption used to clear the government budget and leads to an overall decrease in the macroeconomic aggregates, stemming from a drop in the labor supply. In both cases, the economy has more equally distributed disposable income and consumption. The UBI economy constitutes a welfare loss at the transition if it is expenditure-neutral and results in a gain in the second scenario. |
| Keywords: | Universal Basic Income; Social Insurance; Overlapping Generations; Labor Supply |
| JEL: | E21 H24 J22 |
| Date: | 2021–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:93087&r= |
| By: | Picciotto, Sol |
| Abstract: | The digitalisation of the economy has spotlighted fundamental flaws in international tax rules, which have been exacerbated since the 1970s with the wider shift to the services economy and the growth of international services. These systemic flaws have been more evident from the perspective of countries that are mainly importers of services that have tried to retain rights to tax profits at the source from which they derive. While they succeeded in retaining a wider scope for source taxation, key provisions have been subject to continuing conflicts and contestation over their formulation and interpretation, leaving a legacy of ambiguity and confusion. Digitalisation has now sparked a dramatic reversal of perspective by more developed countries and an acceptance of principles they have long resisted: that taxation of transnational corporations can be based on apportionment of an appropriate fraction of their global income and can be by countries from where they derive income, regardless of physical presence. This paper outlines the contested process that has shaped the formulation of key provisions on taxation of international services, discusses the recent moves to reshape these rules and evaluates some policy options for capital-importing countries to strengthen their taxing rights in the current context. |
| Keywords: | Finance, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:16728&r= |
| By: | Lees, Adrienne; Akol, Doris |
| Abstract: | This paper evaluates the appropriateness of the tax policymaking process that led to the introduction, and the later adaptation, of a tax on mobile money transactions in Uganda in 2018. We examine the unusual source of the proposal, how this particular tax diverged from the usual tax policymaking process, and whether certain key stakeholders were excluded. We argue that weaknesses in the tax policymaking process undermined the quality of policy design, and resulted in a period of costly, and avoidable, policy adjustment. This case study is relevant for Uganda as well as for other low-income countries which could be exposed to similar challenges in designing effective taxes for the mobile money industry. |
| Keywords: | Finance, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:16727&r= |
| By: | Kangave, Jalia; Waiswa, Ronald; Sebaggala, Nathan |
| Abstract: | Most research on tax compliance, including research on gender differences in compliance, is based on one of two problematic sources of data. One is surveys enquiring about attitudes and beliefs about taxpaying, or actual taxpaying behaviour. The other is experiments in which people who may or may not have experience of paying different types of taxes are asked to act out roles as taxpayers in hypothetical situations. Much more accurate and reliable research is possible with access to ‘tax administrative data’, i.e. the records maintained by tax collection organisations. With tax administrative data, researchers have access to tax assessments and tax payments for specific (anonymised) individual or corporate taxpayers. Further, tax administrative data enables researchers to take account of a phenomenon largely ignored in more conventional compliance research. Tax payment is best understood not as an event, but as part of a multi-stage process of interaction between taxpayers and tax collectors. In particular, actually making a tax payment typically represents the culmination of a process that also involves: registering with the tax collecting organisation; filing annual tax returns; filing returns that indicate a payment liability; and receiving an assessment. The multi-stage character of this process raises questions about how we conceptualise and measure tax compliance. To what extent does ‘compliance’ refer to: registration, filing, accurate filing, or payment? The researchers employed this framework while using tax administrative data from the Uganda Revenue Authority to try to determine gender differences in compliance. The results are sensitive to the adoption of different definitions of compliance and subject to year-to-year changes. Finding robust answers to questions about gender differences in tax compliance is more challenging than the research literature indicates. |
| Keywords: | Economic Development, Finance, Gender, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:16483&r= |
| By: | Mascagni, Giulia; Dom, Roel; Santoro, Fabrizio |
| Abstract: | The value added tax (VAT) is supposed to be a tax on consumption that achieves greater economic efficiency than alternative indirect taxes. It is also meant to facilitate enforcement through the ‘self-enforcing mechanism’ – based on opposed incentives for buyers and sellers, and because of the paper trail it creates. Being a rather sophisticated tax, however, the VAT is complex to administer and costly to comply with, especially in lower-income countries. This paper takes a closer look at how the VAT system functions in practice in Rwanda. Using a mixed-methods approach, which combines qualitative information from focus group discussions with the analysis of administrative and survey data, we document and explain a number of surprising inconsistencies in the filing behaviour of VAT-remitting firms, which lead to suboptimal usage of electronic billing machines, as well as failure to claim legitimate VAT credits. The consequence of these inconsistencies is twofold. It makes it difficult for the Rwanda Revenue Authority to exploit its VAT data to the fullest, and leads to firms, particularly smaller ones, bearing a higher VAT burden than larger ones. There are several explanations for these inconsistencies. They appear to lie in a combination of taxpayer confusion, fear of audit, and constraints in administrative capacity. |
| Keywords: | Finance, Governance, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:15915&r= |
| By: | Durst, Michael C. |
| Abstract: | The OECD’s Inclusive Framework is currently considering two substantial tax reform plans, Pillar One and Pillar Two. These are intended to develop a global consensus on methods for taxing the digitalised economy, but in their current form would have broad implications for international tax architecture in general, and particularly for the control of base erosion and profit-shifting (BEPS). This brief focuses on one component of Pillar One: Amount B. This would modify the OECD’s transfer pricing Transactional Net Margin Method (TNMM), as applied to ‘routine’ marketing functions of distribution companies. The TNMM, since its inception in 1995, has become central to tax administration in many countries. This is because multinational enterprises (MNEs) commonly establish ‘limited risk’ subsidiaries in countries where they operate, to perform not only distribution functions, but also manufacturing and service-provider functions. MNEs argue that because subsidiaries incur only limited business risks and perform only ‘routine’ functions, they should be permitted under the arm’s-length standard to earn relatively low profit margins in-country, and to transfer the remainder of their profits, in the form of management fees and other intragroup payments, to affiliates in other countries. The result has been high levels of BEPS. Tax administrations are supposed to use the TNMM to limit profit-shifting from limited risk subsidiaries, including subsidiaries engaged in distribution, manufacturing and service provision. The tax authority must (i) perform a detailed, case-by-case ‘functional analysis’ of the controlled subsidiary, and (ii) using information from commercially available financial databases, carry out ‘comparables studies’ on entities performing similar functions to the controlled subsidiary, ideally in the same country. It must then use statistical analysis to compute an ‘arm’s-length range’ of permissible profit levels, proposing adjustments if reported taxable income falls below the bottom of the range. Summary of ICTD Working Paper 108 by Michael C. Durst. |
| Keywords: | Economic Development, Finance, Governance, |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:15813&r= |
| By: | Ndajiwo, Mustapha |
| Abstract: | The advent of digitalised business models has considerable potential to improve trade in Africa, however, it has greatly exacerbated the two central challenges of international tax. The first challenge is the definition of taxable presence, and the second is the allocation of business profits of multinational enterprises (MNEs) among the different jurisdictions where they operate. This has generated much debate and has seen the rise in unilateral measures in different jurisdictions. This paper is a case study of six African countries, namely Nigeria, Ghana, Senegal, Kenya, Rwanda, and Uganda. The paper examines the issue of nexus and profit allocation and the presence of digitalised businesses in Africa and recommends immediate and long-term options that are available to African countries. The paper reveals that the main problem of taxing highly digitalised businesses is not due to their lack of taxable presence in African countries but to the attribution of profits. The study further revealed that while generally, the six jurisdictions studied are considering the taxation of profits arising from the digitalised economy, efforts so far have focused on indirect taxation. The paper argues that African countries have the immediate advantage of collecting taxes from digitalised transactions through VAT due to its relative administrative ease and the existence of a legal framework, in comparison to corporate taxes. The paper also cautions African countries on transaction taxes, recommending that if African countries decide to impose taxes on transactions, they should be progressive to reduce the regressive impact. In the long term, the paper recommends that the best way forward for African countries would be to build on the G24 proposal under the Inclusive Framework on BEPS, and press for simple formulaic methods which would allocate profits fairly between countries based on real activities in each. |
| Keywords: | Economic Development, Technology, |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:15427&r= |
| By: | Hearson, Martin |
| Abstract: | We could be in the midst of the biggest change to the way multinational companies are taxed in decades. In January 2019, over 130 developed and developing countries committed to ‘go beyond’ some of the fundamental principles that have underpinned cooperation on corporate taxation for a century (OECD 2019a). They opened negotiations to redistribute ‘taxing rights’ over multinational businesses among themselves, a matter previously thought too complex to discuss in a multilateral setting. Their reason for doing so was the challenge of taxing digitalised business models effectively. What makes these proposals potentially radical is not just that they transgress decades-old taxation norms. It’s also that they are being developed within an ‘Inclusive Framework’ (IF) in which many developing countries have a seat at the table. This is an institutional innovation by the Organisation for Economic Cooperation and Development (OECD), a cartel of 36 more developed countries that has historically been the de facto global standard-setter. The IF proposals divide opinion. The Financial Times described them as ‘a global shake-up of corporate taxation’, while according to the International Tax Review, ‘the OECD has stunned the tax world by signalling countries’ willingness to consider radical steps to drag the global corporate tax system into the 21st century’ (Giles 2019; Hartley 2019). In contrast, Joseph Stiglitz accused the OECD of ‘canonizing gradualism’, while civil society groups such as Tax Justice Network Africa and ActionAid believe that the proposals ‘will not adequately address underlying global issues surrounding tax evasion and IFFs [illicit financial flows]’ (Stiglitz 2019; Tax Justice Network Africa and ActionAid Denmark 2019). The BEPS Monitoring Group considers them ‘unnecessarily complex’ and has called for a more comprehensive approach (BEPS Monitoring Group 2019). At the time of writing, the OECD is struggling to hold together a coalition that includes powerful emerging markets such as India, impatient European countries such as France, and an increasingly belligerent United States. The challenge of brokering an agreement among these powerful states is one reason to lower expectations about what the evolving proposals can deliver for developing countries, even though many of them are at the table. Participation in whatever agreement emerges will entail real costs and risks, which must be evaluated against what appear limited potential gains. But there is also much to play for, in this process itself and in the precedents it sets. This paper describes the proposals as they stand, and highlights some of the issues for developing countries. It draws on discussions with developing country negotiators and other participants in the IF discussions between July 2019 and January 2020, as well as their published comments. |
| Keywords: | Economic Development, Finance, Governance, |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:15100&r= |
| By: | Corlin Christensen, Rasmus; Hearson, Martin; Randriamanalina, Tovony |
| Abstract: | For half a century, the most influential international rules and standards for taxing multinational corporations have been formulated by a select group of developed countries, the OECD, with lower-income countries on the outside. Since 2013, this has changed: decision making at the OECD has moved to the ‘Inclusive Framework’ (IF), which today encompasses 137 jurisdictions. There is a lively debate about the extent to which the IF is truly a level playing field for lower-income countries. During late 2019 and 2020, we interviewed 48 negotiators, policymakers and other stakeholders in the IF. We also examined attendance records from OECD working party meetings and published policy documents. We assessed seven OECD and IF policy case studies and one comparison case at the United Nations (UN) Tax Committee (Table 1). This is the first comprehensive, micro-level, comparative account of lower-income countries in these institutions. Our study does not interrogate institutional legitimacy, but it does shed light on the appropriateness of particular institutional forms for addressing current cooperation needs. The IF’s expansion has made little difference to the number of lower-income countries attending meetings at which the practical technical policy work is done, and most members are fairly silent participants. This is partly because of well-documented structural obstacles not unique to the IF, but is exacerbated by some aspects of the OECD’s decision-making processes, such as the pace and intensity of discussions, the culture of policymaking, the costs of attending regular meetings in Paris, and the absence of routine and timely translation of documents and meetings. This can make the OECD a daunting environment for member state delegates, but especially for those from lower-income countries. In addition, many have joined with no intention of influencing standards, but rather in pursuit of technical assistance or prestige, or under coercion from the European Union. Summary of ICTD Working Paper 115 by Rasmus Corlin Christensen, Martin Hearson and Tovony Randriamanalina. |
| Keywords: | Economic Development, Finance, Globalisation, Governance, |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:15882&r= |