nep-pub New Economics Papers
on Public Finance
Issue of 2006‒07‒02
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The correct value of tax shields: An analysis of 23 theories By Fernandez, Pablo
  2. Domestic Taxes and International Trade: Some Evidence By Murtaza H. Syed; Michael Keen
  3. Private Provision of a Complementary Public Good By Schmidtke, Richard
  4. The Distributive Impact of Fiscal Policy in Cameroon: Tax and Benefit Incidence By Tabi Atemnkeng Johannes; Tafah Akwi; Peter Etoh Anzah
  5. Joint Taxation and the Labour Supply of Married Women: Evidence from the Canadian Tax Reform of 1988 By Thomas F. Crossley; Sung-Hee Jeon
  6. Environmental tax and trade liberalization in a mixed duopoly By Shuichi Ohori

  1. By: Fernandez, Pablo (IESE Business School)
    Abstract: This paper provides guidelines to evaluate the appropriateness of 23 different valuation methods for estimating the present value of tax shields. We first show that the value of tax shields is the difference between the present values of two different cash flows with their own risks: the present value of taxes for the unlevered company and the present value of taxes for the levered company. This implies, as a first guideline, that, for the particular case of a perpetuity and a world without costs of leverage, the value of tax shields is equal to the tax rate times the value of debt. The value of tax shields can be lower when costs of leverage exist. In that case, we show that, since the existence of leverage costs is independent of taxes, a second guideline for the appropriateness of the valuation method should be that the value of tax shields, when there are no taxes, is negative. We then look at the case of constant growth and derive similar conclusions. Second, we identify 23 valuation theories proposed in the literature to estimate the present value of tax shields and illustrate their performance relative to the proposed guidelines. Eight of these theories do not satisfy the two proposed guidelines for the case of perpetuities. Only one of the valuation methods is consistent with these restrictions when we look at the case of constant growth and no leverage costs. Two theories provide consistent valuations when we allow for leverage costs and growth. Finally, we use the 23 theories to value a hypothetical firm and show remarkable differences in the values obtained, which demonstrates the importance of using a method consistent with the proposed guidelines.
    Keywords: value tax shields; valuation theories; valuation methods;
    JEL: G12 G31 M21
    Date: 2006–05–13
  2. By: Murtaza H. Syed; Michael Keen
    Abstract: The effects on trade performance of corporate taxes and the value-added tax (VAT) continue to excite controversy but have received little empirical attention. This paper uses panel data for OECD countries from 1967 to 2003 to examine the effects of these taxes on export performance, paying particular attention to the potentially complex dynamic effects to which theory points. It finds that increased reliance on VAT revenue tends to be associated with a sharp reduction in net exports, which quickly fades. This may reflect unrelated movements in consumption, and our preferred specifications point to no trade effects of the VAT in either the short or the long run. Our results also point, however, to powerful and complex effects from the corporate tax, the pattern of which is as theory would predict from a source-based tax of this kind. Increases in corporate taxation-whether measured by revenues or the statutory rate-are associated with sharp short-run increases in net exports (consistent with induced capital flows abroad); these are then subsequently and quickly reversed (consistent with increased income from investments abroad), leaving an increase in net exports that converges to zero.
    Keywords: Taxation , Value added tax , International trade , Economic models ,
    Date: 2006–03–02
  3. By: Schmidtke, Richard
    Abstract: For several years, an increasing number of firms are investing in Open Source Software (OSS). While improvements in such a non-excludable public good cannot be appropriated, companies can benefit indirectly in a complementary proprietary segment. We study this incentive for investment in OSS. In particular we ask how (1) market entry and (2) public investments in the public good affects the firms' production and profits. Surprisingly, we find that there exist cases where incumbents benefit from market entry. Moreover, we show the counter-intuitive result that public spending does not necessarily lead to a decreasing voluntary private contribution.
    Keywords: Open Source Software; Private Provision of Public Goods; Cournot-Nash Equilibrium; Complements; Market Entry
    JEL: C72 L13 L86
    Date: 2006–06
  4. By: Tabi Atemnkeng Johannes; Tafah Akwi; Peter Etoh Anzah
    Abstract: Most fiscal incidence studies neither analyze simultaneously the tax and benefit indicence (simply known as net fiscal incidence) nor actually relate poverty indices to fiscal impact. This paper jointly and separately examines the redistributive and poverty effects of the tax and transfer (education and health) systems in Cameroon. Broadly speaking, the tax system is generally progressive but less so when compared with the benefits of education and health. The net tax system is found to reduce inequality. Interestingly, while overall public spending on education and health are most progressive in rural areas, followed by semi-urban and urban areas, the opposite is true for tax incidence. Tax burden weighs more on the urban, followed by the rural and semi-urban, population. When we consider the two sets of policies together, they are found to mainly reflect fiscal policies in that they are more progressive and poverty-reducing when we use relative poverty lines in rural areas, followed by semi-urban and urban areas, respectively. Though we also realized a poverty-increasing effect of the net tax system using absolute poverty lines, the poverty impact still remains minimal in the rural areas where poverty is high and inequality actually increased between 1996 and 2001 than in urban areas. Overall, the current government policy can help, however, by making sure that the tax burdens of the poor are nil or very low and that the composition and direction of public expenditures on education and health favor the poor.
    Keywords: Fiscal policy, taxes, public expenditures, incidence, inequality, poverty, Cameroon
    JEL: F15 H2 H51 H52 H22 I32 I31
    Date: 2006
  5. By: Thomas F. Crossley; Sung-Hee Jeon
    Abstract: The Canadian federal tax reform of 1988 replaced a spousal tax exemption with a non-refundable tax credit. This reduced the "jointness" of the tax system: after the reform, secondary earners' effective "first dollar" marginal tax rates no longer depended on the marginal tax rates of their spouses. In practice, the effective "first dollar" marginal tax rates faced by women with high income husbands were particularly reduced. Using difference-in-difference estimators, we find a significant increase in labour force participation among women married to higher income husbands.
    Keywords: Labour supply, Canadian tax reform, Married women, Difference-in-difference
    JEL: J22 H24
    Date: 2006–02
  6. By: Shuichi Ohori (Institute of Economic Research, Kyoto University)
    Abstract: This paper studies the environmental tax and trade liberalization in a mixed duopolistic market wherein environmental damage is associated with consumption. In particular, we consider the effect of privatization on environmental tax and the effect of trade liberalization on the environment in an importing country. The results show that the optimal environmental tax in a mixed duopoly is higher than the Pigouvian level and the optimal tax in a pure duopoly. Furthermore, trade liberalization does not alter the environment.
    Date: 2006–06

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