nep-pub New Economics Papers
on Public Finance
Issue of 2015‒12‒20
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Capital Income Taxation and Welfare under DSGE Framework By Unal, Umut
  2. Capitalization of capital gains taxes: (In)attention and turn-of-the-year returns By Sebastian Eichfelder; Mona Lau
  3. Formula apportionment or separate accounting? Tax-induced distortions of multinationals' locational investment decisions By Ortmann, Regina; Pummerer, Erich
  4. Formula apportionment: Factor allocation and tax avoidance By Eichfelder, Sebastian; Hechtner, Frank; Hundsdoerfer, Jochen
  5. Economic Integration, Corporate Tax Incidence and Fiscal Compensation By Nelly Exbrayat; Benny Geys
  6. Tax competition in Europe: Europe in competition with other world regions? By Streif, Frank
  7. Taxation and distribution of income in Brazil: new evidence from personal income tax data By Sérgio Wulff Gobetti; Rodrigo Octávio Orair

  1. By: Unal, Umut
    Abstract: This paper develops a dynamic stochastic general equilibrium (DSGE) model for analyzing the impact of various capital income tax policies in a small open economy that is populated by households possessing endogenous time preferences. We contribute to the literature by studying the impacts of: i) anticipated tax shocks under stochastically growing output, ii) stochastic tax shocks under deterministic output, on our dynamic general equilibrium framework. With our model's specifications, this is the first attempt to integrate uncertainty in the study of taxation and welfare. Our results suggest that only under certain conditions welfare paradoxes may exist, in the sense that increases in tax instruments may improve welfare.
    Keywords: Endogenous time preference, adjustment costs, perturbation methods, stochastic shocks.
    JEL: E62 F4
    Date: 2015
  2. By: Sebastian Eichfelder (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Mona Lau (Faculty of Economics and Management, Freie Universität Berlin and Ernst & Young Berlin)
    Abstract: We argue that the tax capitalization effect is a function of the attention of market participants. Market reactions can therefore be driven not only by the announcement dates of tax events but also by factors influencing the dissemination of tax information, such as deadlines and media reports. Analyzing the introduction date of the earlier-announced German capital gains tax reform of 2009 by triple-difference estimation, we find evidence of a delayed market reaction long after the announcement date. Within the last two (five) trading days before the deadline, we observe a sharp increase in abnormal trading volumes of 151.7% (104.0%). The aggregate abnormal return of the German capital market in the last five trading days in 2008 was 10.6%. Furthermore, we find a significant and positive correlation between trading volumes and measures for awareness of the upcoming tax reform (Google searches and media reports).
    Keywords: Capital gains tax, asset pricing, tax awareness, tax arbitrage, turn-of-the-year effect, market efficiency
    JEL: G02 G12 H24 M41
    Date: 2015–12
  3. By: Ortmann, Regina; Pummerer, Erich
    Abstract: We examine which tax allocation system leads to more severe distortions with respect to locational investment decisions. We consider separate accounting (SA) and formula apportionment (FA). The effects of both systems have been hotly debated in Europe in the past years. The reason is that the EU Member States are striving to implement a common European tax system that would lead to a switch from SA to FA. While existing studies focus primarily on the impact of taxes on locational decisions under either SA or FA, the main innovation of this paper is that it compares both systems with regard to the level of distortions they induce. We compare the optimal pre-tax investment decision with the optimal after-tax investment decision and infer from the difference in the allocation of investment funds which tax allocation system causes more severe distortions. We assume that the multinational group (MNG) has comprehensive book income shifting opportunities under SA. We find that the investment incentives under SA are opposed to those under FA for a profitable investment project. Whereas under SA as much as possible should be invested in a high-tax country, under FA as much as possible should be invested in a low-tax country. The distortions of locational investment decisions tend to be more severe under SA than under FA if a greater share of investment funds is to be invested in a low-tax country from a pre-tax perspective and the investment is profitable. Vice versa, locational decisions may be more distorted under FA if the optimal pre-tax investment decision requires investing a major share of funds in the high-tax country. In contrast to the often stated insensitivity of FA towards income shifting, we find the introduction of a tax allocation system based on FA in Europe could lead to a severe shift of economic substance to low-tax countries. The results of this paper are of particular interest for European policy makers and MNGs as our findings may induce European MNGs to reassess their recent locational investment decisions in the face of a potential future change in the applied tax allocation system.
    Date: 2015
  4. By: Eichfelder, Sebastian; Hechtner, Frank; Hundsdoerfer, Jochen
    Abstract: This paper addresses the question of how firms react to tax incentives in a formula apportionment (FA) tax regime. Under FA, profits of all consolidated entities of a business group are summed and then allocated according to a formula based on FA factors. We hypothesize that firms may change the allocation of real production factors and/or manipulate the FA factor through tax avoidance strategies. Analyzing FA tax effects of the German local business tax with payroll expense as the exclusive FA factor, we find empirical evidence consistent with both hypotheses. Regarding the allocation of production factors, we observe significant tax effects on labor input at the intensive margin but not on labor input at the extensive margin. In addition, we find evidence of an indirect FA spillover effect on capital investment. Our findings on tax avoidance proxies are consistent with tax-induced manipulations of payroll expense as FA factor in order to save tax payments.
    Keywords: Factor Allocation,Formula Apportionment,Profit Shifting,Tax Avoidance
    JEL: H32 H71 H73 J61
    Date: 2015
  5. By: Nelly Exbrayat (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Benny Geys (BI Norwegian School of Management - BI Norwegian School of Management)
    Abstract: Higher corporate taxes are often argued to depress wages (a tax incidence effect), while higher wages may require compensation via lower corporate tax rates (a fiscal compensation effect). Yet, existing empirical evidence ignores that i) both effects are likely to occur simultaneously (necessitating a joint estimation approach), and ii) capital mobility might play a critical moderating role for the strength of both effects. Using a panel dataset comprising 24 OECD countries over the period 1982-2007, we address both these deficiencies. This clearly illustrates the simultaneous existence of tax incidence and fiscal compensation effects. Moreover, capital mobility (and the ensuing relative bargaining power of economic agents) has a significant influence on both the prevalence and strength of these effects.
    Keywords: Wage bargaining, Corporate taxation, Fiscal Compensation,Tax Incidence, Capital mobility
    Date: 2015
  6. By: Streif, Frank
    Abstract: Corporate tax levels have fallen substantially in Europe during the last decades. A broad literature has identified tax competition as one reason for this decline in corporate tax levels. However, none of these studies explicitly asks the question whether tax competition within regions is different from tax competition across regions, e.g. due to global regionalism of foreign direct investments. This is a crucial question to answer in order to discuss the desirability of tax harmonization in a distinct region, for example, within the European Union. Therefore, the study aims to give hints on the question whether the decline in corporate tax levels in Europe is mainly driven by tax competition between EU member states or by pressure from other world regions. The results of this study, which makes use of tax reaction functions, indicate that there is evidence for tax competition within Europe, whereas there is no robust evidence that European countries compete with countries from other world regions.
    Keywords: corporate taxes,tax competition,tax harmonization,Europe
    JEL: H2 H77 H87
    Date: 2015
  7. By: Sérgio Wulff Gobetti (IPC-IG); Rodrigo Octávio Orair (IPC-IG)
    Abstract: "Brazil is one of the countries that, due to a lack of sufficient fiscal transparency, were excluded from the study by economists Anthony Atkinson and Thomas Piketty (2010) which provides a global perspective of the distribution of top incomes using tax data. Fortunately, in 2015 the Department of Federal Revenue of Brazil (RFB) made available to the public more detailed information regarding income tax declarations, making it possible, for example, to identify the Brazilians in the top 0.05 per cent of the income distribution?approximately 71,000 people who earned, on average, BRL4.1 million (EUR1.5 million) in 2013.." (?)
    Keywords: taxation, distribution, Brazil, tax, data
    Date: 2015–12

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