nep-pub New Economics Papers
on Public Finance
Issue of 2016‒10‒02
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Taxation and Corporate Risk-Taking By Langenmayr, Dominika; Lester, Rebecca
  2. Taxing and Subsidizing Foreign Investors By Sharma, Rishi
  3. Measuring tax treaty negotiation outcomes: the Actionaid tax treaties dataset By Martin Hearson
  4. Taxes, stock ownership, and payout policy: Evidence from a 2011 tax reform in Japan By Kazuki Onji; Masanori Orihara
  5. Corporate tax asymmetries and R&D: Evidence from a tax reform for business groups in Japan By Masanori Orihara

  1. By: Langenmayr, Dominika (Catholic University of Eichstatt-Ingolstadt and CESifo, Munich); Lester, Rebecca (Stanford University)
    Abstract: We study whether the corporate tax system provides incentives for risky firm investment. We analytically and empirically show two main findings: first, risktaking is positively related to the length of tax loss periods because the loss rules shift some risk to the government; and second, the tax rate has a positive effect on risk-taking for firms that expect to use losses, and a negative effect for those that cannot. Thus, the sign of the tax effect on risky investment hinges on firm-specific expectations of future loss recovery.
    JEL: G32 H25 H32
    Date: 2016–08
  2. By: Sharma, Rishi (Department of Economics, Colgate University)
    Abstract: Many countries impose taxes on foreign investors while also having in place targeted subsidies and tax incentives that are designed to attract them. This paper shows that such a policy can be optimal from the standpoint of a host country. The government has an incentive to tax inframarginal firms because they are relatively immobile. It also has an incentive to subsidize marginal firms because the economic activity generated by such a subsidy can increase domestic wages in excess of the fiscal cost of the subsidy. These tax and subsidy policies improve host country welfare at the expense of foreigners. This analysis is thus able to provide an explanation for why tax coordination efforts can simultaneously entail reduced taxes and subsidies on foreign firms.
    Keywords: international taxation, foreign direct investment, firm heterogeneity, tax competition
    JEL: H87 H25 F23
    Date: 2016–01–01
  3. By: Martin Hearson
    Abstract: This paper introduces a new dataset that codes the content of 519 tax treaties signed by low- and lower-middle-income countries in Africa and Asia. Often called Double Taxation Agreements, bilateral tax treaties divide up the right to tax cross-border economic activity between their two signatories. When one of the signatories is a developing country that is predominantly a recipient of foreign investment, the effect of the tax treaty is to impose constraints on its ability to tax inward investors, ostensibly to encourage more investment. The merits of tax treaties for developing countries have been challenged in critical legal literature for decades, and studies of whether or not they attract new investment into developing countries give contradictory and inconclusive results. These studies have rarely disaggregated the elements of tax treaties to determine which may be most pertinent to any investment-promoting effect. Meanwhile, as developing countries continue to negotiate, renegotiate, review and terminate tax treaties, comparative data on negotiating histories and outcomes is not easily obtained. The new dataset fills both these gaps. Using it, this paper demonstrates how tax treaties are changing over time. The restrictions they impose on the rate of withholding tax developing countries can levy on cross-border payments have intensified since 1970. In contrast, the permanent establishment threshold, which specifies when a foreign company’s profits become taxable in a developing country, has been falling, giving developing countries more opportunity to tax foreign investors. The picture with respect to capital gains tax and other provisions is mixed. As a group, OECD countries appear to be moving towards treaties with developing countries that impose more restrictions on the latter’s taxing rights, while non-OECD countries appear to be allowing developing countries to retain more taxing rights than in the past. These overall trends, however, mask some surprising differences between the positions of individual industrialised and emerging economies. These findings pose more questions than they answer, and it is hoped that this paper and the dataset it accompanies will stimulate new research on tax treaties.
    Keywords: capital gains tax; corporation tax; double taxation agreement; foreign direct investment; international taxation; sub-Saharan Africa; Asia; tax treaty; withholding tax
    JEL: F53 H25 K33 K34 N47 O23
    Date: 2016–02–21
  4. By: Kazuki Onji (Graduate School of Economics, Osaka University,Japan); Masanori Orihara (Policy Research Institute, Ministry of Finance,Japan)
    Abstract: The 2011 tax reform in Japan changed the definition of the large individual shareholders in the Japanese tax law. As a result of this tax reform, the top marginal tax rate on dividend income for individual investors whose ownership ratios were between 3 and 5% rose from 10 to 43.6%. This tax reform created an incentive for these investors to restrict their ownership stakes to below 3%. We find clear evidence of such ownership adjustments: 51.9% of 3-to-5%-stake investors sold their stocks before the tax hike. The percentage of sellers was 86.1% for those whose ownership ratios were between 3 and 3.1%. We exploit this tax reform to examine whether investors f tax preferences affected firms f payout policy. Individual investors who retained stakes of at or more than 3% after the tax reform had an incentive to encourage firms to pay fewer dividends because dividends were less valuable to them. We predict that firms with such investors would have reduced dividend payout, and find statistical evidence supporting this prediction. Our study provides new quasi-experimental evidence supporting the dividend clientele hypothesis.
    Keywords: large shareholder, payout policy, stock selling, natural experiment
    JEL: G32 G35 G38 H24 H25 H26
  5. By: Masanori Orihara (Policy Research Institute, Ministry of Finance,Japan)
    Abstract: Economic theory dating back to Domar and Musgrave (1944, Quarterly Journal of Economics 58, 388-422) suggests that the tax treatment of gains and losses can affect incentives for firms to undertake high-risk investments. We take advantage of a 2002 tax reform in Japan as a natural experiment to test the theory. This tax reform introduced a consolidated taxation system (CTS). The CTS allows business groups to offset gains with losses across firms in their group. Thus, the CTS can mitigate disincentives to high-risk investments. Using information on R&D as the investment risk measures, we estimate dynamic investment models with unique panel data of Japanese firms between 1994 and 2012. For identification, we take an instrumental variable approach in a difference-in-differences framework or in a triple-differences framework. We provide evidence that the CTS increases R&D, in agreement with Domar and Musgrave (1944). We also find evidence that the CTS enhances risk-sharing across group members and across asset types. These findings suggest that mitigating tax asymmetries is an effective policy to help encourage both risk-taking and risk-sharing.
    Keywords: tax asymmetries, R&D, business group, risk-taking, risk-sharing, natural experiment
    JEL: G31 G38 H25 H32

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