nep-pub New Economics Papers
on Public Finance
Issue of 2015‒03‒05
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation with Incomplete Markets By Thomas Sargent; Mikhail Golosov; David Evans; anmol bhandari
  2. Taxation and the optimal constraint on corporate debt finance By Peter Birch Sørensen
  3. Public pressure and corporate tax behaviour By Scott D Dyreng; Jeffrey L Hoopes; Jaron H Wilde
  4. Are we heading towards a corporate tax system fit for the 21st century? By Michael P Devereux; John Vella
  5. Designing and Implementing a Destination-Based Corporate Tax By Michael Devereux; Rita de la Feria
  6. Taxation of shareholder income and the cost of capital in a small open economy By Peter Birch Sørensen
  7. The Efficiency of “Benefit-Related” Business Taxes By Elisabeth Gugl; George R. Zodrow
  8. The Dynamic Economic Effects of a US Corporate Income Tax Rate Reduction By John W. Diamond; George R. Zodrow; Thomas S. Neubig; Robert J. Carroll
  9. Blueprint for reform of VAT rates in Europe By Rita de la Feria
  10. Tax policy effects on entrepreneurship in canada, 1984-2009: A dynamic panel provincial data approach By Marco Lugo Rodriguez
  11. Effects of fiscal policy in the North and South of Italy By Piacentini, Paolo; Prezioso, Stefano; Testa, Giuseppina
  12. Taxing investments in the Asia-Pacific region: The importance of cross-border taxation and tax incentives By Wiedemann, Verena; Finke, Katharina

  1. By: Thomas Sargent (New York University); Mikhail Golosov (Princeton University); David Evans (New York University); anmol bhandari (New York University)
    Abstract: This paper characterizes tax and debt dynamics in Ramsey plans for incomplete markets economies that generalize an Aiyagari et al. (2002) economy by allowing a single asset traded by the government to be risky. Long run debt and tax dynamics can be attracted not only to the first-best continuation allocations discovered by Aiyagari et al. for quasi-linear preferences, but instead to a continuation allocation associated with a level of (marginal-utility-scaled) government debt that would prevail in a Lucas-Stokey economy that starts from a particular initial level of government debt. The paper formulates, analyzes, and numerically solves Bellman equations for two value functions for a Ramsey planner, one for t ≥ 1, the other for t = 0.
    Date: 2014
  2. By: Peter Birch Sørensen (University of Copenhagen, Department of Economics)
    Abstract: The tax bias in favour of debt finance under the corporate income tax means that corporate debt ratios exceed the socially optimal level. This creates a rationale for thincapitalization rules limiting the amount of debt that qualifies for interest deductibility. This paper sets up a model of corporate finance and investment in a small open economy to quantify the deadweight loss from the asymmetric tax treatment of debt and equity and to identify the second-best optimal debt-asset ratio in the corporate sector. For plausible parameter values derived from data for the Norwegian economy, the deadweight loss from the tax distortions to corporate financing decisions amounts to 2-3 percent of total corporate tax revenue, and the socially optimal debt-asset ratio is 4-5 percentage points below the debt level currently observed. Driving the actual debt ratio down to this level would generate a total welfare gain of about 3 percent of corporate tax revenue. The welfare gain would arise partly from a fall in the social risks associated with corporate investment, and partly from the cut in the corporate tax rate made possible by a broader corporate tax base.
    Date: 2014
  3. By: Scott D Dyreng (Fuqua School of Business, Duke University); Jeffrey L Hoopes (Fisher School of Business, Ohio State University); Jaron H Wilde (Tippie College of Business, University of Iowa)
    Abstract: We examine whether public pressure related to compliance with subsidiary disclosure rules influences corporate tax behaviour. ActionAid International, a non-profit activist group, levied public pressure on non-compliant UK firms in the FTSE 100 to comply with a rule requiring UK firms to disclose the location of all of their subsidiaries. We use this natural experiment to examine whether the public pressure led scrutinized firms to decrease tax avoidance and reduce the use of subsidiaries in tax haven countries relative to other firms in the FTSE 100 not affected by the public pressure. The evidence suggests that the public scrutiny sufficiently changed the costs and benefits of tax avoidance such that tax expense increased for scrutinized firms. The results suggest that public pressure from outside activist groups can exert a significant influence on the behaviour of large publicly-traded firms. Our findings extend prior research that has had little success documenting an empirical relation between public scrutiny of tax avoidance and firm behaviour.
    JEL: H25 H26 H20 G39
    Date: 2014
  4. By: Michael P Devereux (University of Oxford); John Vella (University of Oxford)
    Abstract: The most significant problems with the existing system for taxing the profit of multinational companies stem from two related sources. First, the underlying “1920s compromise” for allocating the rights to tax profit between countries is both inappropriate and increasingly hard to implement in a modern economic setting. Second, because the system is based on taxing mobile activities, it invites countries to compete with each other to attract economic activity and to favour “domestic” companies. The OECD Base Erosion and Profit Shifting (BEPS) initiative essentially seeks to close loopholes rather than to re-examine these fundamental problems. As a consequence, it is unlikely to generate a stable long-run tax system. We briefly outline some more fundamental alternative reforms.
    Date: 2014
  5. By: Michael Devereux (Oxford University Centre for Business Taxation); Rita de la Feria (Durham University)
    Abstract: The current international tax system based upon the principles of source and residence is no longer suited to a globalised world economy, and the fundamentals of the international tax system need to be re-examined. An R+F based cash-flow tax based on the principle of destination has been proposed as a suitable alternative to taxing corporations in an international setting. The aim of this paper is to discuss the legal and practical issues which would arise in the implementation of such a tax, namely how a destination-based tax could be effectively designed and implemented. For this purpose we draw on experiences with designing VAT systems worldwide. It is proposed that the destination principle should be implemented through use of the customers’ location as the main legal proxy. We argue that the country where the customer is located has both the substantive jurisdiction to tax, i.e. the legitimacy to impose tax, and enforcement jurisdiction to tax, i.e. the effective legal and implementing means of collecting the proposed tax. As regards enforcement jurisdiction to tax, we propose that a one-stop-shop system similar to that being experimented in VAT as the most effective means of collecting tax. Other potential implementing issues are addressed, namely deductibility of expenses and tax credits, susceptibility to avoidance and fraud, treatment of financial transactions, and treatment of small businesses. We conclude that, if it were applied in an international cooperation setting, it would indeed be legitimate and administratively possible to implement a destination-based corporate tax.
    Date: 2014
  6. By: Peter Birch Sørensen (University of Copenhagen, Department of Economics)
    Abstract: When companies finance their investment via the international markets for stocks and bonds, relief from domestic personal taxes on dividends and capital gains will not reduce the cost of capital. Some authors have shown that even for small domestic companies whose shares are not traded internationally, domestic shareholder tax relief will not necessarily reduce the cost of equity finance. This paper argues that, under realistic assumptions, domestic shareholder tax relief will in fact reduce the cost of capital for small firms. It also argues that a shareholder income tax on the equity premium with full loss offset will improve the allocation of risk in the economy.
    Date: 2014
  7. By: Elisabeth Gugl (Department of Economics, University of Victoria); George R. Zodrow (Baker Institute for Public Policy, Rice University; Centre for Business Taxation, Oxford University)
    Abstract: Most of the tax competition literature focuses on the provision of local public services to households. However, a number of papers, dating back to Zodrow and Mieszkowski (1986), analyze tax competition when capital taxes are used to finance local public services provided to businesses, examining to which extent such services are provided efficiently, under-provided, or over-provided. In addition, several prominent observers have noted that “benefit-related” business taxation is desirable on efficiency and equity grounds and argued that such taxation should take the form of a production tax, such as an origin-based value added tax. We evaluate this contention in this paper, comparing within the context of a model of interjurisdictional competition the relative efficiency properties of business taxes that are assessed on production to those assessed on capital. We also provide a brief review of the literature on capital tax competition when public services are provided to businesses.
    Keywords: business public services, infrastructure, tax competition, capital taxes
    JEL: H41 H42 H21 H11
    Date: 2014
  8. By: John W. Diamond (Baker Institute for Public Policy, Rice University); George R. Zodrow (Baker Institute for Public Policy, Rice University); Thomas S. Neubig (Quantitative Economics and Statistics, Ernst & Young, LLP); Robert J. Carroll (Quantitative Economics and Statistics, Ernst & Young, LLP)
    Abstract: This paper focuses on a reduction in the statutory corporate income tax rate. Of course, a reduction in the corporate tax rate would have to be financed by expansion of the corporate tax base, an increase in other taxes, a reduction in spending, and/or an increase in the deficit. The analysis considers three potential financing alternatives: elimination of a wide range of business tax expenditures, an increase in individual income taxes on labor income, and a decrease in government expenditures in the form of income transfers. Each package is designed to be revenue neutral in a dynamic sense, that is, taking into account the effects of the reform over time on saving, investment, labor supply, and other 3 macroeconomic variables. The dynamic analysis in the paper reflects simulations of the macroeconomic effects of reform using a modified version of a dynamic, overlapping generations, computable general equilibrium model developed by Diamond and Zodrow.
    Date: 2014
  9. By: Rita de la Feria (Durham University)
    Abstract: Within Europe differentiated rates structures date back to the introduction of VAT itself. Evidence as regards the negative consequences of applying multiple rates has been apparent for some decades. In this context, since the late 1980s, there have been several attempts to amend European rates structures under the political guidance of the European Commission. However, the most recent agreed upon amendments to the rates structure have increased the level of differentiation, rather than decreased it, with more goods and services being subject to reduced rates in Europe today than even as recently as ten years ago. This reality seems to be changing in the last few years. Since 2008 a staggering twenty-two of the twenty-eight EU Member State countries have increased their VAT rates, resulting in a broad convergence of VAT standard rates across the EU around the 21% mark. Furthermore, there has also been a decrease in levels of differentiation with a reduction in number of VAT rates applicable in many Member States, as well as various base broadening measures. The latest developments seem to indicate that conditions may be present which allow the reversal of the status quo bias, creating the opportunity for base broadening tax reform. This raises the possibility that European countries might engage in an involuntary process of convergence of VAT bases, fuelled by domestic necessities. A politically achievable blueprint for reform of VAT rate structures in European is presented, which would result in a broader-based, and thus more efficient and neutral, VAT. Moreover, application of this blueprint across EU Member States would have the additional advantage of resulting in further convergence of VAT rate structures in Europe, to replace the long-sought, but so far unattainable, EU harmonisation.
    Date: 2014
  10. By: Marco Lugo Rodriguez
    Abstract: In this paper, we examine the effects of fiscal policy on entrepreneurship outcomes in the Canadian provinces for the 1984 – 2009 period. This is the first paper to assess the impact of taxation on entrepreneurship in Canada by using intensive-margin measures (i.e. entrepreneurial income and employment) instead of more commonly used participation measures, as they are thought to be more closely related to policy goals such as entrepreneurial sustainability. A dynamic panel data approach is employed in order to account for potential trends in both taxation policy and entrepreneurial outcomes. The results are consistent with previous literature of the United States and indicate that if the trends, caused by incomplete labour mobility among other things, are indeed important then tax policy has no statistically significant impact on the measured entrepreneurial outcomes. <P>
    Keywords: Entrepreneurship, tax policy, dynamic panel estimators,
    Date: 2014–12–01
  11. By: Piacentini, Paolo; Prezioso, Stefano; Testa, Giuseppina
    Abstract: Abstract: This paper contributes to a growing body of work within ‘fiscal policy studies’, investigating for the recent role of fiscal policy on the Italian economy. Using annual data collected on regional basis, this study estimates and compares the (impact and cumulative) fiscal multipliers across the North and the South, the less developed area, of Italy. With recourse to a simultaneous equation model for the two macro-regions of Italy, it estimates the overall impact of the measures of budget consolidation policies in the period 2011-2013. Our analysis reveals that tax rises and spending cuts hit the South harder than the North.
    Keywords: Keywords: Tax multiplier, Government spending multiplier, Fiscal Policy.
    JEL: E23 E62 H20 H24
    Date: 2015–02–24
  12. By: Wiedemann, Verena; Finke, Katharina
    Abstract: This paper investigates the taxation of investments in the Asia-Pacific region. Our analysis is based on the methodology of Devereux and Griffith (1999, 2003) for determining effective average tax rates. This approach allows us to account for important national and international tax regulations. Our results show that the overall dispersion of effective tax burdens in Asia-Pacific ranges from 10.6% in Hong Kong to 40.4% in India for domestic investments (overall average of 23.4%). In 8 out of 19 jurisdictions covered, investments are, however, effectively taxed at a rate between 20% and 25%. If the investment is made by a foreign investor, cross-border taxation has a significant impact on the overall tax burden. In any of the Asia-Pacific jurisdictions, foreign direct investments by a Singaporean or a German parent company are on average taxed at 29.2% and at 32.8% in case of a US investor. Meanwhile, tax incentives for the stimulation of private investment reduce the effective average tax rate by 8.6 percentage points on average. Fiscal incentives targeted at investments in the high technology sector or the development of specific geographic areas result in the lowest effective tax burdens.
    Keywords: Corporate Taxation,Effective Average Tax Rate,Tax Incentives,Asia
    Date: 2015

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