nep-pub New Economics Papers
on Public Finance
Issue of 2009‒09‒05
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Taxing Risky Investment By Michael P. Devereux
  2. Profit Taxation and Finance Constraints By Christian Keuschnigg; Evelyn Ribi
  3. Capital Income Taxation Revisited: The Role of Information Asymmetry in the Credit Market By Ho , Wai-Hong; Wang, Yong
  4. The Direct Incidence of Corporate Income Tax on Wages By Wiji Arulampalam; Michael P Devereux; Giorgia Maffini
  5. Corporate Taxation and the Choice of Patent Location within Multinational Firms By Tom Karkinsky; Nadine Riedel
  6. Common corporate tax base (CCTB) and effective tax burdens in the EU member states By Oestreicher, Andreas; Reister, Timo; Spengel, Christoph
  7. Value Added Taxes, Chain Effects and Informality By Aureo de Paula; Jose A. Scheinkman
  8. Does Labor Supply Respond to a Flat Tax? Evidence from the Russian Tax Reform By Denvil Duncan; Klara Sabirianova Peter
  9. Local Government Taxation in Pakistan By Roy Bahl; Musharraf Cyan
  10. Pakistan Tax Policy Report: Tapping Tax Bases for Development By Jorge Martinez-Vazquez; Kaspar Richter
  11. Ethnic diversity and attitudes towards redistribution: a review of the literature By Stichnoth, Holger; Straeten, Karine Van der

  1. By: Michael P. Devereux (Centre for Business Taxation, Said Business School, University of Oxford)
    Abstract: This paper re-examines the impact of consumption and capital income taxes on (a) the incentive to undertake risky investment and (b) the revenue generated from such taxes. It challenges a well-known claim in the literature that a capital income tax with full loss offset can leave incentives to invest "basically unaffected" because the tax liability is offset by a reduction in the post-tax risk of the investment. Instead, it argues that such a tax would have a significantly negative impact on the incentive to invest.
    JEL: H25 H32 E22
    Date: 2009
  2. By: Christian Keuschnigg (University of St. Gallen (IFF-HSG), CEPR and CESifo); Evelyn Ribi (University of St. Gallen (IFF-HSG))
    Abstract: In the absence of financing frictions, profit taxes reduce investment by their effect on the user cost of capital. With finance constraints due to moral hazard, investment becomes sensitive to cash-flow and own equity of firms. We propose a corporate finance model of investment and derive three central results: (i) Even small taxes impose first order welfare losses on financially constrained firms; (ii) ACE and cashflow tax systems, which are investment neutral in the neoclassical model, are no longer neutral when firms are finance constrained. (iii) When banks are active and provide external finance together with monitoring services, the two systems not only reduce investment, but are also no longer equivalent. With active banks, investment is subject to double moral hazard and the timing of tax payments becomes important. The ACE system gives tax relief at the return stage and provides better incentives than a cash-flow tax which gives tax relief upfront.
    Keywords: Finance constraints, profit tax, cash-flow tax, ACE tax
    JEL: G38 H25
    Date: 2009
  3. By: Ho , Wai-Hong; Wang, Yong
    Abstract: This paper reexamines the issue of optimal capital income taxation in an endogenous growth model with overlapping generations. By assuming costly state verification for capital producing projects, we show that the presence of the information asymmetry creates inefficiency in the credit market by driving a wedge between the rate of interest and the rate of transformation. In this context, we further show that capital income taxation worsens the credit market distortions and, subsequently, induces greater adverse effects on growth and welfare. Taken together, our analysis suggests that the presence of informational frictions in the credit market introduces a rationale for more conservative taxation on capital income from both growth and welfare perspectives.
    Keywords: Capital income taxation; Asymmetric information; Economic growth
    JEL: H21 O41 D82
    Date: 2009–09–01
  4. By: Wiji Arulampalam (University of Warwick and Oxford University Centre for Business Taxation); Michael P Devereux (Oxford University Centre for Business Taxation); Giorgia Maffini (University of Warwick and Oxford University Centre for Business Taxation)
    Abstract: We examine how far taxes on corporate income are directly shifted onto the workforce. We use data on 55,082 companies located in nine European countries over the period 1996–2003. We identify this direct shifting through cross-company variation in tax liabilities, conditional on value added per employee. Our central estimate is that the long run elasticity of the wage bill with respect to taxation is -0.093. Evaluated at the median, this implies that an exogenous rise of $1 in tax would reduce the wage bill by 75 cents. We find only weak evidence of a difference for multinational companies.
    Date: 2009
  5. By: Tom Karkinsky (Oxford University Centre for Business Taxation); Nadine Riedel (Oxford University Centre for Business Taxation)
    Abstract: This paper investigates whether corporate taxation affects the location of patents within a multinational group. We exploit a unique dataset which links patent data from the European Patent Office to micro panel data on European firms for 1995-2003. Our results suggest that the host country’s corporate tax rate exerts a negative effect on the number of patents filed by a multinational subsidiary. The effect is statistically significant and quantitatively large and turns out to be robust against controlling for affiliate size. The findings prevail if we additionally account for royalty withholding taxes. Moreover, binding ‘Controlled Foreign Company’ rules tend to decrease the number of patent applications.
    Keywords: corporate taxation, multinational enterprise, profit shifting
    JEL: H25 F23 H26 C33
    Date: 2009
  6. By: Oestreicher, Andreas; Reister, Timo; Spengel, Christoph
    Abstract: The article assesses the impact of a Common Corporate Tax Base (CCTB) as promoted by the European Commission and the related Working Groups on the effective tax burdens of companies in all 27 EU member states. The results shall help to evaluate the economic consequences of introducing a harmonized set of tax accounting rules for EU-based companies. The proposals for a CCTB covered here include depreciation on intangibles, machinery, buildings, furniture and fixture, simplified valuation of inventories, determination of production costs for stocks, treatment of costs for R&D as part of production costs, provisions for future pension payments, provisions for legal obligations, avoidance of double taxation regarding dividend income, and loss relief. The proposed options for a CCTB are applied for average EU-27 corporations of different size as well as for model companies belonging to different economic sectors.
    Keywords: European Taxation,Tax Harmonization,Tax Accounting,Effective Tax Burdens
    JEL: H20 H21 H25 K34
    Date: 2009
  7. By: Aureo de Paula (Department of Economics, University of Pennsylvania); Jose A. Scheinkman (Department of Economics, University of Pennsylvania)
    Abstract: This paper investigates determinants of informal economic activity. We present an equilibrium model of informality and test its implications using a survey of 48,000+ small firms in Brazil. We define informality as tax avoidance; firms in the informal sector avoid tax payments but suffer other limitations. A novel theoretical contribution in this model is the role of value added taxes in transmitting informality. It predicts that the informality of a firm is correlated to the informality of firms from which it buys or sells. The model also implies that higher tolerance for informal firms in one production stage increases tax avoidance in downstream and upstream stages. Empirical analysis shows that, in fact, various measures of formality of suppliers and purchasers (and its enforcement) are correlated with the formality of a firm. Even more interestingly, when we look at sectors where Brazilian firms are not subject to the credit system of value added tax, but instead the value added tax is applied at some stage of production at a rate that is estimated by the tax authorities, this chain effect vanishes.
    Keywords: Informal Sector,VAT,Tax Avoidance
    JEL: H2 H3 K4
    Date: 2009–08–01
  8. By: Denvil Duncan (Andrew Young School of Policy Studies, Georgia State University); Klara Sabirianova Peter (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: We exploit the exogenous change in marginal tax rates created by the Russian flat tax reform of 2001 to identify the effect of taxes on labor supply of males and females. We apply the weighted difference-in-difference regression approach and instrumental variables to the labor supply function estimated on individual panel data. The mean regression results indicate that the tax reform led to a statistically significant increase in male hours of work but had no effect on that of females. However, we find a positive response to tax changes at both tails of the female hour distribution. We also find that the reform increased the probability of finding a job among both males and females. Despite significant variation in individual responses, the aggregate labor supply elasticities are trivial and suggest that reform-induced changes in labor supply were an unlikely explanation for the amplified personal income tax revenues that followed the reform.
    Keywords: labor supply, personal income tax, flat tax, labor supply elasticity, difference-in-difference, regression discontinuity, wage endogeneity, employment participation, Russia, transition.
    Date: 2009–06–01
  9. By: Roy Bahl (Andrew Young School of Policy Studies, Georgia State University); Musharraf Cyan (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: The purpose of this paper is to evaluate the current practice of local government taxation in Pakistan and to point the way toward structural reforms that are both more rational and more in step with Pakistan’s vision for its fiscal decentralization. The analysis here is restricted to sub provincial governments, i.e., districts, TMA’s and union councils but with a decided emphasis on the former two. We do this by examining the current practice, and by drawing on international comparisons and “best practices” as laid out in the theory of fiscal federalism.
    Keywords: Local Government Taxation, Pakistan, Fiscal Decentralization
    Date: 2009–08–01
  10. By: Jorge Martinez-Vazquez (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Kaspar Richter
    Abstract: Pakistan’s economic development is once again threatened by macroeconomic imbalances. Broadly speaking, high growth in the 1960s was followed by low growth in the 1970s, and high growth in the 1980s by low growth in the 1990s, as macroeconomic vulnerabilities derailed development. Supported by a favorable global environment, Pakistan returned to a strong development record for much of this decade. Growth accelerated and fiscal and social indicators improved. But as in the past, the gains proved unsustainable, as economic policies adjusted too little and too late to a deterioration in the external environment. The looming crisis is threatening to undo much of the recent development progress.
    Keywords: Pakistan, Tax policy, Tax Bases
    Date: 2009–08–01
  11. By: Stichnoth, Holger; Straeten, Karine Van der
    Abstract: We review the empirical literature that studies the effect of ethnic diversity on the welfare state and on individual attitudes. The outcome variables that we cover in the survey are on the one hand public spending, and on the other hand individual attitudes and behaviour, including charity spending. We also review the fast-growing literature that uses experiments to study the effects of ethnic diversity. Many of these studies have appeared since the pioneering survey by Alesina and La Ferrara (2005a), and have not been covered by a survey before.
    Keywords: redistribution,social security,welfare state,immigration,ethnic diversity,survey
    JEL: H53 H55 I38 J15 J61
    Date: 2009

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