nep-pub New Economics Papers
on Public Finance
Issue of 2009‒11‒07
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Personal Income Tax Reforms as a Competitive Advantage By Vita Jagric; Sebastjan Strasek; Timotej Jagric; Tanja Markovic-Hribernik
  2. Tax Progressivity, Income Distribution and Tax Non-Compliance By Tatiana Damjanovic; David Ulph
  3. Signalling, Social Status and Labor Income Taxes By Ennio Bilancini; Leonardo Boncinelli
  4. VAT and the EC Internal Market: The Shortcomings of Harmonisation By Rita de la Feria
  5. Corporate Taxation and the Choice of Patent Location within Multinational Firms By Tom Karkinsky; Nadine Riedel
  6. MNC Dividends, Tax Holidays and the Burden of the Repatriation Tax: Recent Evidence By Harry Grubert
  7. Tax Competition and Income Sorting: Evidence from the Zurich Metropolitan Area By Christoph A. Schaltegger; Frank Somogyi; Jan-Egbert Sturm
  8. Tax Haven Activities and the Tax Liabilities of Multinational Groups By Giorgia Maffini
  9. Transfer Pricing Policy and the Intensity of Tax Rate Competition By Johannes Becker; Clemens Fuest
  10. Foreign Taxes, Domestic Income, and the Jump in the Share of Multinational Company Income Abroad By Harry Grubert

  1. By: Vita Jagric (Department of finance, Faculty of Economics and Business, University of Maribor); Sebastjan Strasek (Department for economic policy, Faculty of Economics and Business, University of Maribor); Timotej Jagric (Department for quantitative economic analysis, Faculty of Economics and Business, University of Maribor); Tanja Markovic-Hribernik (Department of finance, Faculty of Economics and Business, University of Maribor)
    Abstract: In this paper we show features of the personal income taxation in Slovenia and some early reforms on it. The proposed tax reforms have the same origins as in any other developed economy - loss of competitive advantages of the economy. We present the process of reforming the tax system in Slovenia as it took place in recent years. We also analyze results of our simulation on different scenarios of personal income taxation in Slovenia. Finally, in the concluding section, we examine the results of introduced reforms and present our critical view.
    Keywords: tax reform, fiscal sustainability, personal income tax
    JEL: H2 H5 J3
    Date: 2009–05
  2. By: Tatiana Damjanovic (University of St. Andrews St Salvator’s College); David Ulph (University of St. Andrews St Salvator’s College, Oxford University Centre for Business Taxation)
    Abstract: This article examines the determinants of tax non-compliance when we recognise the existence of an imperfectly competitive "tax advice" industry supplying schemes which help taxpayers reduce their tax liability. We apply a traditional industrial organisation framework to model the behaviour of this industry. This tells us that an important factor determining the equilibrium price and hence, the level of noncompliance, is the convexity of the demand schedule. We show that in this context, this convexity is affected by the distribution of pre-tax income, the progressivity of the tax-schedule and the way in which monitoring and penalties vary with income. It is shown that lower pre-tax income inequality as well as a less progressive tax code may cause more tax minimisation activities. Therefore, the frequently advocated policy of reducing the highest tax rate may fail as a policy directed at improving tax discipline. One way of offsetting the possible harm to tax compliance from a less progressive tax could be an adjustment of the penalty and monitoring functions.
    Keywords: tax compliance, tax administration, inequality, tax progressivity, tax monitoring, penalty function
    JEL: H21 H23 H26
    Date: 2009
  3. By: Ennio Bilancini; Leonardo Boncinelli
    Abstract: We investigate the effects of introducing a linear labor income tax under the assumptions that individuals have concerns for social status, that they can signal their relative standing by spending on a conspicuous good, and that the tax revenue is redistributed by means of lump sum transfers. We show that the way social status is defined – i.e. how relative standing is computed and evaluated – crucially affects the desirability of the tax policy. More precisely, if status is ordinal then a labor income tax can decrease waste in conspicuous consumption only if the distribution of pre-tax incomes (or earning potentials) is not too unequal. The same applies for the tax to induce a Pareto improvement, but with the bound on pre-tax inequality being smaller. Instead, if status is cardinal then neither requirement applies: for any degree of pre-tax inequality we can find a cardinal notion of status such that the introduction of a labor income tax induces both a waste reduction and a strict Pareto improvement. However, under cardinal status a labor income tax is not necessarily more desirable than under ordinal status. Indeed, if status is cardinal in the sense that the status differential between being considered rich and being considered poor is strongly dependent on the income of the rich, then a labor income tax is more likely to increase social waste than under ordinal status.
    Keywords: social status; relative standing; consumption externalities; labor income; income tax; signalling; conspicuous consumption; income inequality
    JEL: D11
    Date: 2009–10
  4. By: Rita de la Feria (Oxford University Centre for Business Taxation)
    Abstract: From the outset, turnover taxes have played a fundamental role in the European integration process. Harmonisation of these taxes was perceived an integral part of achieving a common market, and for this reason it was given priority. Over forty years since the introduction of a common VAT system, VAT is usually regarded as a broadly harmonised tax. Paradoxically, however, it is precisely this high level of harmonisation which seems to have allowed the preservation of some aspects of VAT law which constitute an obstacle to the establishment of the EC internal market. The aim of this paper is to highlight the shortcomings of harmonisation within the VAT area, and namely how harmonisation has prevented the European Court of Justice (ECJ) from applying the EC Treaty provisions to the field of VAT, resulting in the maintenance of laws which could arguably be regarded as contrary to the EC internal market and as restrictions to the fundamental freedoms.
    Date: 2009
  5. By: Tom Karkinsky (Oxford University Centre for Business Taxation); Nadine Riedel (Oxford University Centre for Business Taxation, CESifo Munich)
    Abstract: Corporate patents are perceived to be the key profit-drivers in many multinational enterprises (MNEs). Moreover, as the transfer pricing process for royalty payments is often highly intransparent, they also constitute a major source of profit shifting opportunities between multinational entities. For both reasons, MNEs have an incentive to locate their patents at affiliates with a relatively small corporate tax rate. Our paper empirically tests for this relationship by exploiting a unique dataset which links information on patent applications to micro panel data for European MNEs. Our results suggest that the corporate tax rate (differential to other group members) indeed exerts a negative effect on the number of patents filed by a subsidiary. The effect is quantitatively large and 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: Harry Grubert (U.S. Treasury)
    Abstract: We address two issues: 1. Do dividends from foreign subsidiaries depend on the residual home country tax, and can this be reconciled with existing models? The evidence seems to be inconsistent with both the Hartman-Sinn ‘New View’ and the Weichenreider and Altshuler-Grubert repatriation avoidance models. 2. Does the huge inflow of dividends in response to the 2005 repatriation tax holiday suggest that the burden of the repatriation tax in a worldwide-credit system is very significant? We review the evidence on the negative relationship between dividends and repatriation taxes including new results for the relationship between total foreign dividends and average foreign tax rates at the parent level. The explanation for the negative impact of the repatriation tax seems to be that tax avoidance strategies are not costless, as was assumed by the earlier models, and that the marginal costs rise as the pool of accumulated financial assets grows relative to the subsidiary’s real assets. Subsidiaries in low-tax locations refrain from repatriating longer as the marginal cost of additional deferrals rises to equal the repatriation tax. A recent paper by Grubert and Altshuler suggests that the impact of tax differences on repatriations declines over time and disappears after 25 years. The ‘immature’ stage seems to last a long time. Analysis of 2004 repatriations at the subsidiary level indicates that the parent’s average foreign tax rate is most important to its decision, not the subsidiary’s own effective tax rate or the average effective tax rate in its country of incorporation. Tax planning has made the country of incorporation less significant. The burden of the repatriation tax is a particularly significant issue because it bears on the comparison of exemption versus worldwide credit systems. Past estimates of the burden, including both actual payments and the ‘implicit’ cost of avoiding repatriations, have been modest. Furthermore, it is difficult to identify any effect of the potential repatriation tax on companies’ investment decisions. But this insignificant importance of the repatriation tax has been called into question by the huge repatriations (of almost $400 billion) under the 2005 tax holiday in which companies could repatriate and pay a 5.25 percent tax net of a scaled down foreign tax credit. The paper therefore examines the Treasury company level data for companies’ participation in the tax holiday. There is, however, no necessary conceptual link between participation in the tax holiday and the burden of the dividend tax. The measure of the tax relevant for real investment decisions is the present value of the direct and implicit taxes relative to the returns. Even if that burden is low a mature company with large accumulations may well choose to pay the tax holiday price because of the rising costs of deferrals. Even in a Sinn steady state ‘new view’ equilibrium, a repatriation tax holiday would trigger asset liquidations and large repatriations. A company will repatriate to where the marginal cost of further accumulations is below the 5.25 percent tax price. The reason is the ‘fresh start’ which permits it to save costs on future deferrals. Some of the participants in the tax holiday had very low current repatriation avoidance costs as evidenced by the fact that many had substantial accumulations of ‘previously taxed income’ (PTI) under the CFC rules that they could have chosen to repatriate tax free. As expected, a company’s tax holiday repatriations are a positive function of its accumulated untaxed income and foreign profit margin, and a negative function of its average foreign tax rate, the ratio of its real capital to sales and its accumulated PTI.
    Date: 2009
  7. By: Christoph A. Schaltegger; Frank Somogyi; Jan-Egbert Sturm
    Abstract: In this paper, we provide empirical evidence for the influence of income taxes on the choice of residence of taxpayers at the local level. The fact that Swiss communities can individually set tax multipliers thereby shifting the progressive tax scheme which is fixed at the cantonal (state) level enables us to study the effect of differences in income taxation on individuals’ choice of location within an economically and culturally homogeneous region. Using panel IV regressions covering the years 1991-2003 and 171 communities in the Swiss canton of Zurich and spatial error regressions for the 171 communities in 2003, we find substantial evidence for income sorting.
    Keywords: tax competition; fiscal federalism; income segregation; income tax
    JEL: H71 H73 R50
    Date: 2009–09
  8. By: Giorgia Maffini (University of Oxford Centre for Business Taxation and University of Warwick.)
    Abstract: This paper investigates the effect of tax haven operations on the tax liabilities of corporate groups headquartered in 15 OECD countries. Using consolidated accounting data from ORBIS (2003-2007), this work finds that, at the mean, an additional tax haven subsidiary reduces tax liabilities over total assets by 7.4 per cent in the long run. At the mean, the marginal effective tax rate (ETR) of a corporate group with tax haven subsidiaries is one percentage point lower than it is for groups without low-tax offshore operations. The results also show that the marginal ETR of companies headquartered in countries with a territorial system is lower than that of companies headquartered in jurisdictions with a worldwide system of taxation on corporate profits. More specifically, corporate groups headquartered in the United States have the highest marginal ETR.
    Keywords: Corporate Income Tax; Multinationals; Profit shifting; Tax Havens
    JEL: F23 H25 H32
    Date: 2009
  9. By: Johannes Becker (Max Planck Institute for Intellectual Property, Competition and Tax Law); Clemens Fuest (Oxford University Centre for Business Taxation)
    Abstract: This note provides a novel argument why countries may have incentives to allow for some profit shifting to low-tax jurisdictions. The reason is that a tightening of transfer pricing policies by high tax countries leads to more agressive tax rate competition by low tax countries.
    Keywords: Corporate Taxation, Profit Shifting, Tax Competition
    JEL: H25 F23
    Date: 2009
  10. By: Harry Grubert (U.S. Treasury)
    Abstract: Since 1996 the foreign share of U.S. multinational corporations’ worldwide income has risen sharply. For example, in a sample of large nonfinancial MNCs, the aggregate foreign share increased from 37.1 percent in 1996 to 51.1 percent in 2004. This increase is decomposed into its major sources, and the role of taxes in each component is evaluated. We also examine the sources of the decline in average effective foreign tax rates, such as the introduction of the check-the-box provisions in 1997. The basic components of the 14.0 percentage point change are the increase in domestic losses (6.0 percent), the increase in companies’ worldwide profits holding their share constant at the 1996 level (5.0 percentage points) and finally letting each company’s foreign share change (3.0 percentage points). There is some evidence that lower average foreign tax rates in 2004 were associated with greater domestic losses but it probably contributed no more than 1 percentage point of the 6.0 percentage point component. The very rapid income growth of companies that already had a large foreign share in 1996, which explains the 5.0 percentage point second component, raises the question as to the role of taxes in determining each company’s share in 1996. In fact a company’s average effective foreign tax rate had an important effect, particularly on foreign and domestic profit margins. Domestic profit margins were higher if the average foreign tax rate was higher. The difference between average foreign effective rates and the U.S. effective rate seems to explain 3 to 4 percentage points of the 5 percentage point component. Finally the reduction in average foreign effective tax rates, of about 5.0 percentage points from 1996 to 2004, explains about 2.0 percentage points of the 3.0 percentage point change in foreign share component. This was all through the impact on foreign and domestic profit margins and not through a shift in sales. Indeed there was a major shift in foreign and domestic profit margins on sales over the period, with mean foreign profit margins rising by 5.0 percentage points and falling by 2.0 percentage points at home. In examining the sources of the decline in average effective foreign tax rates, we conclude that the ‘check-the-box’ provisions enabled U.S. companies to reduce their foreign tax burdens by about 2.0 percentage points. The active finance exception, which permitted U.S. companies to defer income from a financial business, also introduced in 1997, contributed about another percentage point to the decline in foreign rates.
    Date: 2009

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