nep-pub New Economics Papers
on Public Finance
Issue of 2006‒07‒09
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Control of Externalities in the Presence of Income Taxation By Louis Kaplow
  2. Capital Gains Taxes and Asset Prices: Capitalization or Lock-In? By Zhonglan Dai; Edward Maydew; Douglas A. Shackelford; Harold H. Zhang
  3. Tax Treatment of Business Investments in Intellectual Assets: An International Comparison By Jacek Warda
  4. Progressive Taxation Under Centralised Wage Setting By Pekka Sinko
  5. Tax riots By Marco Bassetto; Christopher Phelan
  6. Cost of Capital for Cross-border Investment: The Fallacy of Estonia as a Tax Haven By Seppo Kari; Jouko Ylä-Liedenpohja

  1. By: Louis Kaplow
    Abstract: A substantial literature examines second-best environmental policy, focusing particularly on how the Pigouvian directive that marginal taxes should equal marginal external harms needs to be modified in light of the preexisting distortion due to labor income taxation. Additional literature is motivated by the possibility that distributive concerns should amend the internalization prescription. It is demonstrated, however, that simple first-best rules – unmodified for labor supply distortion or distribution – are correct in a natural, basic formulation of the problem. Specifically, setting all commodity taxes equal to marginal harms (and subsidies equal to marginal benefits) can generate a Pareto improvement. Likewise, a marginal reform in the direction of the first-best can yield a Pareto improvement. For other reforms, a simple efficiency test characterizing when a Pareto improvement is possible is offered. Qualifications and explanations for the substantial departure from results in previous work are also elaborated.
    JEL: D61 D62 D63 H21 H23 K32
    Date: 2006–06
  2. By: Zhonglan Dai; Edward Maydew; Douglas A. Shackelford; Harold H. Zhang
    Abstract: This paper examines the impact on asset prices from a reduction in the long-term capital gains tax rate using an equilibrium approach that considers both demand and supply responses. We demonstrate that the equilibrium impact of capital gains taxes reflects both the capitalization effect (i.e., capital gains taxes decrease demand) and the lock-in effect (i.e., capital gains taxes decrease supply). Depending on time periods and stock characteristics, either effect may dominate. Using the Taxpayer Relief Act of 1997 as our event, we find evidence supporting a dominant capitalization effect in the week following news that sharply increased the probability of a reduction in the capital gains tax rate and a dominant lock-in effect in the week after the rate reduction became effective. Nondividend paying stocks (whose shareholders only face capital gains taxes) experience higher average returns during the week the capitalization effect dominates and stocks with large embedded capital gains and high tax sensitive investor ownership exhibit lower average returns during the week the lock-in effect dominates. We also find that the tax cut increases the trading volume during the week immediately before and after the tax cut becomes effective and in stocks with large embedded capital gains and high tax sensitive ownership during the dominant lock-in week.
    JEL: H2 G1 D4 M4
    Date: 2006–06
  3. By: Jacek Warda
    Abstract: In a knowledge-based economy, business performance and overall levels of economic growth are increasingly dependent on the development and exploitation of intellectual assets. A number of OECD countries offer tax incentives to encourage and reward business expenditures on intellectual assets. This working paper examines the tax treatment of corporate expenditures on selected intellectual assets and develops an indicator of the relative generosity of tax systems in OECD countries to such investments. Five types of intellectual assets are considered: research and development (R&D), patents, workforce training, software and organisational change. The paper shows that although tax incentives have, to date, mainly favoured R&D expenditures, they are gradually embracing other types of intellectual assets, especially in those countries that provide more generous tax treatment of R&D. Nineteen OECD countries had specific R&D tax incentives in place in 2005, up from only 12 in 1996, and 6 offered tax incentives for corporate training. <BR>Dans une économie du savoir, la performance des entreprises et les taux de croissance économique globaux dépendent de plus en plus du développement et de l’exploitation d’actifs intellectuels. Un certain nombre de pays de l’OCDE appliquent des mesures d’incitation fiscale afin d’encourager et de valoriser les dépenses des entreprises portant sur des actifs intellectuels. Ce document de travail examine le régime fiscal des dépenses des entreprises portant sur certains actifs intellectuels et définit un indicateur de la générosité relative des systèmes fiscaux des pays de l’OCDE vis-à-vis de ces investissements. Cinq catégories d’actifs intellectuels sont envisagées : recherche et développement (R-D), brevets, formation de la main-d’oeuvre, logiciels et changement organisationnel. La note montre que, si les incitations fiscales ont surtout à ce jour favorisé les dépenses de R-D, elles s’appliquent aussi de plus en plus à d’autres catégories d’actifs intellectuels, surtout dans les pays qui accordent déjà un régime fiscal plus généreux à la R-D. Dix-huit pays de l’OCDE appliquaient des mesures d’incitation fiscale spécifique à la R-D en 2005, au lieu de 12 seulement en 1996, et 6 d’entre eux appliquaient des mesures d’incitation fiscale aux dépenses de formation des entreprises.
    Date: 2006–05–22
  4. By: Pekka Sinko
    Abstract: The study reconsiders the effects of tax progression in imperfectly competitive labour markets. Allowing for the individual supply of working hours, we show that the results derived in the standard model of decentralised wage bargaining do not hold if the wage setting is centralised or highly coordinated. We show that increased progression is more likely to harm employment if either i) the initial tax system is progressive or ii) the wage setting is centralised or co-ordinated. If the wage setting institutions are centralised or strongly co-ordinated, increased progression may be bad for employment even when departing from a proportional tax system.
    Keywords: Tax progression, wage setting, employment.
    JEL: C10 J30 H20
    Date: 2004–12–01
  5. By: Marco Bassetto; Christopher Phelan
    Abstract: This paper considers an optimal taxation environment where household income is private information, and the government randomly audits and punishes households found to be underreporting. We prove that the optimal mechanism derived using standard mechanism design techniques has a bad equilibrium (a tax riot) where households underreport their incomes, precisely because other households are expected to do so as well. We then consider three alternative approaches to designing a tax scheme when one is worried about bad equilibria.
    Date: 2006
  6. By: Seppo Kari; Jouko Ylä-Liedenpohja
    Abstract: The initial cost of capital of a foreign subsidiary, financed by its parent from abroad, is dependent on repatriation taxes and this also applies to all follow-up investments financed from marginal foreign profits, representing the required return on the initial investment. Only investments financed from intra-marginal foreign profits are independent of repatriation taxes, but their cost of capital depends inversely on the dividend tax of the home-country parent?s owners. We calibrate the cost of capital formulae to the Estonian and Finnish parameters of taxing international investment income. The calculations show that Estonian subsidiaries, which pay no tax on undistributed profits but a corporate dividend tax, offer tax benefits to their parents only in terms of intra-marginal profits.
    Keywords: Direct investment, tax incentives, corporate tax
    JEL: H87 H32 H25
    Date: 2005–04–28

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