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on Public Economics |
| By: | Ricardo Guerrero Fernandez |
| Abstract: | Recent evidence from developing countries shows that the bottom of the income distribution pays more taxes relative to their income than the top 1%, highlighting a lack of tax progressivity in these societies. Current measures of tax progressivity fail to indicate which part of the income distribution explains this. Following the Palma Ratio intuition, this paper introduces the concept of vertical progressivity and a new index, the Progressive Vertical Index (PVI), which assesses the relationship between the tax burdens of the top 1% and the bottom 50% of the population. |
| Keywords: | Income distribution, Tax progressivity, Effective tax rate, Income inequality, Latin America |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2024-65 |
| By: | Selin, Håkan (IFAU - Institute for Evaluation of Labour Market and Education Policy) |
| Abstract: | In a dual income tax (DIT) system, labor income is taxed progressively, while capital income is subject to a lower proportional tax. DIT systems were introduced in Sweden, Norway, and Finland in the early 1990s. In the absence of rules restricting capital income distributions, owners of closelyheld corporations would easily be able to circumvent the progressive tax on earned income by withdrawing an appropriate amount of dividends instead of wages. The Nordic countries adopted very different income splitting models, with immediate implications for the tax treatment of dividends. In this article I first review the principles of the income splitting rules of Sweden, Norway, and Finland. I then discuss some of the tradeoffs involved in the design of such rules. |
| Keywords: | Income taxation; Nordic comparison; dividend taxation |
| JEL: | G35 H32 |
| Date: | 2024–11–18 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:ifauwp:2024_020 |
| By: | Cowx, Mary (Arizona State U); Lester, Rebecca (Stanford U); Nessa, Michelle (Michigan State U) |
| Abstract: | We study the tax payment and innovation consequences of limiting the tax deductibility of research and development (“R&D†) expenditures. Beginning in 2022, U.S. companies are required to capitalize and amortize R&D rather than immediately deduct these expenditures. We utilize variation in U.S. firms’ fiscal year ends to test the effects of the R&D tax change in a difference-in-differences framework. We first document that affected U.S. firms’ cash effective tax rates increase by 11.9 percentage points (62%), on average. We then test and find decreases in R&D investment among domestic-only, research-intensive, and constrained firms. In aggregate, these estimates translate to a reduction in R&D of $12.2 billion in the first year among the most research-intensive firms. Further, we observe decreased capital expenditures and share repurchases among affected companies, suggesting that firms also reduced other types of investment and shareholder payout to meet the increased cash tax liability. The paper provides policy relevant evidence about the significant real effects of limiting innovation tax incentives. |
| JEL: | H25 M41 M48 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4192 |
| By: | Koeniger, Winfried (University of St. Gallen); Kress, Peter (University of St. Gallen) |
| Abstract: | We use novel transaction-level card expenditure data to estimate the effect of the temporary value-added tax (VAT) cut in Germany 2020. We find that the annualized growth rate of expenditures for durables increased by 6 percentage points (pp) during the tax cut, with a particularly strong increase of up to 11 pp for consumer electronics. The expenditure growth rate for semi-durables and non-durables did not change by and large. The estimates imply a consumption multiplier of 0.2 and an elasticity of fiscal revenues to a VAT rate reduction of two thirds. |
| Keywords: | consumption expenditure, transactional data, temporary VAT cut, unconventional fiscal policy |
| JEL: | D12 E21 E62 E65 H31 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17412 |
| By: | Thomadakis, Apostolos |
| Abstract: | The current international system that coordinates corporate income tax is increasingly unable to deal with a highly integrated and digitalised economy. To avoid taxes, multinational enterprises (MNEs) exploit the system’s inadequacies by shifting profits to low or non-tax jurisdictions – about 40 % of EU MNEs’ profits have been shifted to low-tax jurisdictions. In July 2021, to ensure that profits are taxed where economic activities take place, the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) agreed on an historic two-pillar solution. Following this, in December 2021 the European Commission proposed a directive to implement Pillar Two in the EU. In December 2022, after several attempts to harmonise taxes, Member States finally and unanimously agreed to adopt the Directive, ensuring a global minimum level of taxation of 15 % for MNEs. A new study ‘EU corporate taxation in the digital era’, highlights the main developments in corporate taxation over the last few decades in both the EU and the US. It analyses MNEs’ activity and profit shifting, and the impact of a 15 % minimum corporate tax. It also discusses the critical points in Pillar Two’s design that have raised concerns and require careful calibration. Finally, it proposes recommendations on how to improve Pillar Two’s functioning and how to implement the Business in Europe: Framework for Income Taxation BEFIT, stressing the importance of simplicity and uniformity. Launched in February 2022, a CEPS-ECMI Task Force brought together a working group of industry experts, corporates, academia and EU/international institutions for research and discussion over a period of 18 months. To improve the functioning of Pillar Two, the study specifically proposes that: There should be consistency between the sequencing of the Global Anti-Base Erosion (GloBE) rules in the EU Directive and the OECD’s Administrative Guidance. The principles of the single market must be adhered to, while the constant streamlining of national rules should be promoted. Cleary defining safe harbours should stabilise and substantially simplify the GloBE rules, and if this takes longer than anticipated to finalise, extending the transitory country-by-country safe harbour rules should be considered. The rules for settling litigation should be a high priority within the Inclusive Framework, while special rules at EU level should also be considered. To ensure the coordination of Pillar Two with the BEFIT, the study recommends that: BEFIT should aim for simplification, a reduction in compliance costs and uniformity within the EU to increase the EU’s competitiveness. In short, it should build on Pillar Two rules as much as possible. The optionality of rules could be considered, at least on a temporary basis. BEFIT should be based on strict derivation from financial reporting, with very few corrections. For the sake of simplification and uniform application within the EU, International Accounting Standards and International Financial Reporting Standards should apply and, contrary to the GloBE rules, the use of national accounting rules should not be allowed. As for when to implement BEFIT, an adequate timespan relating to the implementation of the GloBE rules would be best, to avoid overburdening tax administrations and taxpayers. |
| Date: | 2023–09 |
| URL: | https://d.repec.org/n?u=RePEc:eps:cepswp:40760 |
| By: | Telma Yamou; Mr. Alun H. Thomas; Kaihao Cai |
| Abstract: | This paper examines the relationship between citizens’ perceptions of tax authorities and the governments’ efficiency in collecting VAT and CIT revenues in Africa. Drawing on data from 32 countries over 2014-2019, we find a negative and significant association between negative perceptions of trust in authorities (the tax department) from the Afrobarometer survey and tax efficiency for these revenue categories. A 1 percent increase in the share of citizens’ perception of little or no trust in the tax department leads to a 0.22 percent decrease in VAT tax efficiency, controlling for macroeconomic indicators. The magnitude of the effect is significantly greater in fragile compared to non-fragile states. For corporate income tax productivity focusing on tax payments of corporates we find a significant effect only in fragile states. Perceptions about corruption in tax authorities have a similar effect on VAT and CIT tax efficiency since perceptions about trust and corruption capture the tendency to misappropriate revenues but we are unable to distinguish the two effects except for fragile states. Our findings suggest that in the face of fragility, policies aimed at improving fiscal capacity should place a high importance on ensuring that citizens believe resources will be used properly, an aspect of tax policy not typically prioritized. |
| Keywords: | Trust in authorities; fragility; tax efficiency; Africa |
| Date: | 2024–11–08 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/234 |
| By: | Hess, Ryan (U of Georgia); Black, Emily (New York U); Javed, Zaynah (Stanford U); Hennessy, Jonathan (Stanford U); Lester, Rebecca (Stanford U); Goldin, Jacob (U of Chicago); Ho, Daniel E. (Stanford U); Portz, Annette (US Internal Revenue Service) |
| Abstract: | U.S. partnerships control more than $40 trillion in assets, vastly outnumber U.S. public firms, and contribute significantly to the U.S. tax non-compliance of pass-through entities, which is larger than the non-compliance of publicly traded corporations. However, the prior literature provides extremely little evidence explaining the pervasive use of such entities and which specific characteristics enable the lightly taxed nature of partnership business income. Using administrative U.S. tax data, we first create graphical organizational structures by tracing income through millions of partnership entities. We show that 80 percent of partnership groups are simple structures composed of one single partnership owned directly by individual taxpayers. In contrast, the most complex structures resemble “webs, †characterized by multiple tiers of ownership and clusters of overlapping partners. Second, we determine the entity attributes associated with partnerships developing into complex organizations. Third, conditional on being selected for audit, complex partnerships are four percent less likely to be assessed additional tax, but the amount of assessments is larger. Fourth, we show that complex partnership audits have a high return-on-investment, generating $20 of assessments for each $1 spent, which is a rate over eight times that for corporations. Thus, beyond adding to the nascent literature explaining the prevalent use of partnerships, we provide new insights about the under-reporting of tax on U.S. business income and quantify the potentially large increases in tax revenue collection that could be obtained from increased enforcement of complex partnership businesses. |
| JEL: | D85 H24 H25 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4219 |
| By: | Andrew G. Biggs; Alicia H. Munnell; Michael Wicklein |
| Abstract: | The U.S. Treasury estimates that the tax preference for employer-sponsored retirement plans and IRAs reduced federal income taxes by about $185-$189 billion in 2020, equal to about 0.9 percent of gross domestic product. Other estimates of the costs are even larger. However, the best evidence suggests that the federal tax preferences do little to increase retirement saving. While this dismal assessment may sound like bad news, it actually offers policymakers an opportunity to strengthen the nation’s retirement income system. Revenues saved from repealing the retirement saving tax preferences could be reallocated to address the majority of Social Security’s long-term funding gap, strengthening a program that is crucial for the retirement security of older Americans while bypassing a decades-old debate about raising taxes or reducing Social Security benefits. This study reassesses the favorable tax treatment of retirement plans and explores an opportunity to use taxpayer resources more productively. The first section addresses the revenue loss, considering the impact not only on the personal income tax but also the payroll tax, concluding that the revenues forgone are significant no matter how they are measured. The second section examines who receives these tax expenditures, concluding that the bulk goes to high earners. The third section explores what taxpayers get for their money, finding that the favorable tax treatment has failed to significantly increase national saving. Given the enormous federal deficits and overwhelming demands on the federal budget, the fourth section explores ways to recoup all or some of the tax subsidies currently accorded retirement saving. The fifth section explores how the savings from eliminating or reducing the tax subsidies could be applied to Social Security. The final section concludes that it makes little sense to throw more and more taxpayer money at employer plans and IRAs. In fact, the case is strong for eliminating the current tax expenditures on retirement plans, and using the increase in tax revenues to address Social Security’s long-term financing shortfall. |
| Date: | 2024–01 |
| URL: | https://d.repec.org/n?u=RePEc:crr:crrwps:wp2024-1 |
| By: | Bryson, Alex (University College London); Dale-Olsen, Harald (Institute for Social Research, Oslo) |
| Abstract: | Norwegian workers' job mobility decisions are related to firms' wage policies, but also depend on the national tax schedule. By utilising Norwegian population-wide administrative linked employer-employee data on workers and firms between 2010-2019, we study how the job-to-job turnover of employees is affected by marginal taxes and firms' pay policies, enabling inferences to be made about on-the-job search. Paying higher wages is associated with a drop in job-to-job separation rates, but this negative relationship is weakened when income taxes increase. Higher taxes imply strictly reduced search activity, but less so for bonus job-workers than salaried workers. |
| Keywords: | job search, marginal taxes, monopsony, wages, effort |
| JEL: | H24 J42 J63 M12 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17385 |
| By: | Batabyal, Amitrajeet; Beladi, Hamid |
| Abstract: | We analyze how a permanent shift in political power in a region that is creative a la Richard Florida affects tax policy and economic outcomes. There are three groups of individuals in our region: laborers or workers, creative class members or entrepreneurs, and the elites. The elites initially hold political power but then they lose it to the creative class. We describe the Markov perfect equilibrium of the political game between the above three groups. Specifically, we first derive the optimal taxes that are levied on the elites and on the creative class, by the creative class. Next, we compute the discounted utility of the elites when the creative class holds political power and compare this to their utility when they are in control of politics. |
| Keywords: | Creative Class, Elite, Entrepreneur, Political Game, Tax Policy |
| JEL: | H21 R11 |
| Date: | 2024–06–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122595 |
| By: | Gayle, Philip; Faheem, Adeel |
| Abstract: | The literature argues that Post and Hold (PH) laws facilitate tacit collusive price-setting behavior among suppliers of alcoholic beverages. Yet there is no explicit empirical test of this claim. We specify and estimate a structural model designed to identify the extent to which PH laws induce tacit collusive price-setting behavior among beer suppliers. Our estimates reveal evidence of PH law-induced collusive behavior that causes higher prices and lower consumption. Furthermore, we find that an alcohol content tax as a replacement for PH regulation yields the highest surplus to consumers compared to a sales tax or the PH regulation. |
| Keywords: | Post and Hold Regulation; Competitive Conduct; US Beer Industry; Externality; Corrective Tax Policy |
| JEL: | H21 H23 I18 K00 L13 L40 L66 |
| Date: | 2024–10–22 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122541 |