nep-pub New Economics Papers
on Public Finance
Issue of 2007‒05‒12
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Tax Treatment of Dividends and Capital Gains and the Dividend Decision Under Dual Income Tax By Seppo Kari; Hanna Karikallio
  2. Unit Versus Ad Valorem Taxes : The Private Ownership of Monopoly In General Equilibrium By Blackorby, Charles; Murty, Sushama
  3. Why Do Most Countries Set High Tax Rates on Capital? By Nicolas Marceau; Steeve Mongrain; John D. Wilson
  4. Nordic Dual Income Taxation of Entrepreneurs By Seppo Kari; Vesa Kanniainen; Jouko Ylä-Liedenpohja

  1. By: Seppo Kari; Hanna Karikallio
    Abstract: The paper analyses efficiency aspects of a dual income tax system with a higher tax on capital gains than dividends. It argues that apart from the distortions to investments claimed in earlier literature, the system puts even more emphasis in creating incentives for entrepreneurs to participate in tax planning. The paper suggests that the owner of a closely held company can avoid all personal taxes on entrepreneurial income by two tax-planning strategies. The first is the avoidance of distributions, which would be taxed at the tax rate on labour income. These funds would instead be invested in the financial markets. The second strategy is a distribute-and-call-back policy, converting retained profits into new equity capital. Interestingly, the outcome is that investment in real capital is not distorted in the long-run equilibrium. Empirical evidence using micro data is also provided.
    JEL: H24 H25
    Date: 2007–04–05
  2. By: Blackorby, Charles (Department of Economics,University of Warwick and GREQAM); Murty, Sushama (Department of Economics, University ofWarwick)
    Abstract: In an earlier paper [Blackorby and Murty ; 2007] we showed that if a monopoly sector is imbedded in a general equilibrium framework and profits are taxed at one hundred percent, then unit (specific) taxation and ad valorem taxation are welfare-wise equivalent. In this paper, we consider private ownership of the monopoly sector. Given technical difficulties in making a direct general equilibrium comparison of unit and ad valorem taxation, we adopt a technique due to Guesnerie [1980] and Quinzii [1992] in a somewhat different context of increasing returns and non-convex economies to show that neither ad valorem taxation nor unit taxation Pareto dominates the other; although, generally, the two are not welfare-wise equivalent.
    Keywords: Ad valorem taxes ; unit taxes ; monopoly
    JEL: H21
    Date: 2007
  3. By: Nicolas Marceau; Steeve Mongrain; John D. Wilson
    Abstract: We consider tax competition in a world with tax bases exhibiting different degrees of mobility, modeled as mobile and immobile capital. An agreement among countries not to give preferential treatment to mobile capital results in an equilibrium where mobile capital is nevertheless taxed relatively lightly. In particular, one or two of the smallest countries, measured by their stocks of immobile capital, choose relatively low tax rates, thereby attracting mobile capital away from the other countries, which are then left to set revenue maximizing taxes on their immobile capital. This conclusion holds regardless of whether countries choose their tax policies sequentially or simultaneously. In contrast, unrestricted competition for mobile capital results in the preferential treatment of mobile capital by all countries, without cross-country differences in the taxation of mobile capital. Nevertheless our main result is that the non-preferential regime generates larger global tax revenue, despite the sizable revenue loss from the emergence of low-tax countries. By extending the analysis to include cross-country differences in productivities, we are able to resurrect a case for preferential regimes, but only if the productivity differences are sufficiently large.
    Keywords: Tax Competition, Capital Mobility
    JEL: F21 H87
    Date: 2007
  4. By: Seppo Kari; Vesa Kanniainen; Jouko Ylä-Liedenpohja
    Abstract: The paper shows how entrepreneurial taxes interact with the career choice of individuals, the quality of entrepreneurs, and their investment behavior. It is particularly relevant to differentiate the early effects on start-up enterprises with substantial uncertainty from the tax effects on mature firms where the uncertainty is resolved. Conditions are derived for the Nordic dual income tax to be neutral and they are found to be stringent. Profit expectations matter. The Nordic dual encourages (discourages) the establishment of new enterprises by entrepreneurs who anticipate high (low) profitability.
    JEL: H25
    Date: 2007–04–05

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