nep-pub New Economics Papers
on Public Finance
Issue of 2015‒01‒19
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation with Endogenous Default under Incomplete Markets By Ignacio Presno; Demian Pouzo
  2. Knocking on Tax Haven's Door: Multinational Firms and Transfer Pricing By Ronald B. Davies; Julien Martin; Mathieu Parenti; Farid Toubal
  3. Effective tax rates under IP tax planning By Evers, Lisa; Spengel, Christoph
  4. Local Taxation, Private-Public Consumption Complementarity, and the Optimal Number of Jurisdictions By Soldatos, Gerasimos T.
  5. Income taxation and equity: New dominance criteria and an application to Romania By Paolo Brunori; Flaviana Palmisano; Vito Peragine
  6. Public private partnerships By Miranda Sarmento, J.

  1. By: Ignacio Presno (Federal Reserve Bank of Boston); Demian Pouzo (UC Berkeley)
    Abstract: In a dynamic economy, we characterize the fiscal policy of the government when it levies distortionary taxes and issues defaultable bonds to finance its stochastic expenditure. Households predict the possibility of default, generating endogenous debt limits that hinder the government's ability to smooth shocks using debt. Default is followed by temporary financial autarky. The government can only exit this state by paying a fraction of the defaulted debt. Since this payment may not occur immediately, in the meantime, households trade the defaulted debt in secondary markets; this device allows us to price the government debt before and during the default.
    Date: 2014
  2. By: Ronald B. Davies (University College Dublin; Institute for International Integration Studies, Trinity College Dublin; CES-Ifo); Julien Martin (Department of Economics, Universit\'e du Qu\'ebec \`a Montr\'eal, Canada); Mathieu Parenti (CORE-UCLouvain and IRES UCLouvain (Belgium), NRU-Higher School of Economics (Russia)); Farid Toubal (Ecole Normale Supérieure de Cachan, Paris School of Economics and CEPII, France)
    Abstract: This paper analyzes the transfer pricing of multinational firms. We propose a simple framework in which intra-firm prices may systematically deviate from arm's length prices for two motives: i) pricing to market, and ii) tax avoidance. Multinational firms may decide not to avoid taxes if the risk to be sanctioned is high compared to the tax gap. Using detailed French firm-level data on arm's length and intra-firm export prices, we find that both mechanisms are at work. The sensitivity of intra-firm prices to foreign taxes is reinforced once we control for pricing-to-market determinants. Most importantly, we find almost no evidence of tax avoidance if we disregard exports to tax havens. Back-of-the-envelope calculations suggest that tax avoidance through transfer pricing amounts to about 1\% of the total corporate taxes collected by tax authorities in France. The lion's share of this loss is driven by the exports of 450 firms to ten tax havens. As such, it may be possible to achieve significant revenue increases with minimal cost by targeting enforcement.
    Keywords: Transfer pricing, Tax haven, Pricing to market
    JEL: F23 H25 H25 H32
    Date: 2014–12
  3. By: Evers, Lisa; Spengel, Christoph
    Abstract: Tax planning with intangibles has become one of the most popular and most vividly debated topics in international taxation. We incorporate various intellectual property (IP) tax planning models into forward-looking measures of effective tax rates, namely the disposal of intangibles to low-tax subsidiaries, intra-group licensing arrangements, and intra-group contract R&D. In doing so, we draw upon the methodology put forward by Devereux and Griffith and amend this model by considering a research & development (R&D) investment which is carried out by a parent company, whereby the resulting intangible is exploited by a foreign subsidiary. We point out analytically under which conditions IP tax planning achieves the objective of reducing the effective average tax rate of the group. We find that the disposal of intangibles to low-tax subsidiaries does not achieve this tax planning objective, if the true value of the asset is subject to tax upon the disposal. We show to what extent the parent must understate the value of the intangible in order to reduce the group's tax burden. We furthermore point out that contract R&D may generally achieve a significant lower effective tax burden. We present cost of capital and effect average tax rates to illustrate these findings.
    Keywords: corporate taxation,effective tax rate,tax planning,profit shifting,transfer pricing,intellectual property,intangible assets,contract R&D
    JEL: F23 H25 H32 H87 K34
    Date: 2014
  4. By: Soldatos, Gerasimos T.
    Abstract: Viewing local finances under the approach to private-public consumption complementarity, we conclude that foot voting and tax competition become extinct when the (capital) tax structure across jurisdictions is the one forging close ties between the burgher and his/her jurisdiction. Feeling the burgher attached to the local public goods offered and to the local business activity, prevents labor and capital relocation. The optimal number of jurisdictions is that which is conducive to the adoption of that local taxation that fosters such an attachment; taxation made possible by capitalizing upon private-public consumption complementarity. The intuitive appeal of this result is then contemplated within the broader framework of fiscal policymaking accommodative of citizen heterogeneity. In view of complementarity, there appears to be scope for decentralized treatment of citizen preferences via the localities, leaving the treatment of endowment differences to the central government
    Keywords: Local taxation, Private-public consumption complementarity, Citizen heterogeneity, Burgher-community attachment
    JEL: H71 H73 H79
    Date: 2014
  5. By: Paolo Brunori (University of Bari, Italy); Flaviana Palmisano (University of Luxembourg); Vito Peragine (University of Bari, Italy)
    Abstract: This paper addresses the problem of the normative evaluation of income tax systems and income tax reforms. While most of the existing criteria, framed in the utilitarian tradition, are uniquely based on information about individual incomes, this paper, building upon the opportunity egalitarian theory, proposes new equity criteria which take into account also the socio-economic characteristics of individuals. Suitable dominance conditions that can be used to rank alternative tax systems are derived by means of an axiomatic approach. Moreover, the theoretical results are used to assess the redistributive effects of an hypothetical tax reform in Romania through a microsimulation analysis.
    Keywords: Income inequality, inequality of opportunity, tax reforms, microsimulation, progressivity, horizontal equity.
    JEL: D63 E24 O15 O40
    Date: 2014–11
  6. By: Miranda Sarmento, J.
    Abstract: Public-private partnerships (PPPs) are increasing in number worldwide and are used to build and manage large public infrastructure projects. In PPPs, the private sector plays a role in developing and maintaining public infrastructure and services, which is usually a public sector responsibility. Despite the relevance of this subject, economic and finance literature is still scarce. This gap between practitioners and theory must be addressed and means a requirement for understanding this phenomenon from a finance perspective: what are PPPs and project finance, how they create value for the public and private sectors, and how they are structured and financed. Since 1993, Portugal has been using PPPs intensively, mainly for highway construction and in the health sector. Portugal has used PPPs to build an extensive highway network. As one of the leading countries using PPPs, the Portuguese experience is impressive, relevant, and an interesting study subject. However, there has been little discussion and research, with only a few studies published. This thesis covers several issues on PPPs: The first chapter is a literature review on risk allocation, valuation and Value for Money; The second chapter uses a case-study methodology to review the PPP life cycle; The third chapter describes the Portuguese experience in PPP renegotiations; The fourth chapter addresses the PPP efficiency by using seven highway projects and the Malmquist index efficiency model; The last chapter addresses the public sector efficiency in building infrastructures by public procurement.
    Date: 2014

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