nep-pub New Economics Papers
on Public Finance
Issue of 2022‒07‒11
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Impacts of New International Tax System on Multinational Firms' FDI By Yea, Sangjun
  2. Macroeconomic Effects of Capital Tax Rate Changes By Saroj Bhattarai; Jae Won Lee; Woong Yong Park; Choongryul Yang
  3. Do Investors Care About Consumption Taxes? Evidence from Equities in Advanced and Emerging Economies By Hayley Pallan
  4. Innovation to Keep or to Sell and Tax Incentives By Colin Davis; Laixun Zhao
  5. Family affairs or Government's duty? The tax morality of a mobile society By Rocco Caferra Author-Name-First Rocco; Alessandro Cascavilla Author-Name-First Alessandro; Andrea Morone
  6. Causal Effects of a Tax Incentive on SME Capital Investment By HOSONO Kaoru; HOTEI Masaki; MIYAKAWA Daisuke
  7. Are Fiscal Consolidation Episodes Helpful for Public Sector Efficiency? By António Afonso; José Alves
  8. Developing Asia’s Fiscal Landscape and Challenges By Go, Eugenia; Hill, Sam; Jaber, Maria Hanna; Jinjarak, Yothin; Park, Donghyun; Ragos, Anton
  9. Tax morale and social capital: an empirical investigation among European citizens By Alessandro Cascavilla Author-Name-First Alessandro; Jordi Ripollés; Andrea Morone
  10. Global Profit Shifting of Multinational Companies: Evidence from CbCR Micro Data By Clemens Fuest; Stefan Greil; Felix Hugger; Florian Neumeier

    Abstract: In this study, I present a theoretical model to quantitatively assess the economics impact of Pillar 1 and Pillar 2, especially focusing on the changes in the FDI patterns of multinational enterprises (MNEs). Pillar 1 offsets the incentives of MNEs' profits-shifting for tax-planning purposes, thereby reducing the inbound FDI into the countries with low corporate income tax rates. Pillar 2 burdens MNEs with 'top-up' taxes attributed from the subsidiaries in low tax countries. As the profits after tax (PAT) of MNEs shrink at the global level, innovation and R&D investment for new products will decrease, and as a result, global FDI flows will hamper.
    Keywords: International Tax System; Multinational Firms; FDI
    Date: 2022–04–28
  2. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park; Choongryul Yang
    Abstract: We study aggregate, distributional, and welfare effects of a permanent reduction in the capital tax rate in a quantitative model with capital-skill complementarity and household heterogeneity. Such a tax reform leads to expansionary long-run aggregate output and investment effects, but those are coupled with increases in wage, consumption, and income inequality. The tax reform is not self-financing and its effects depend crucially on whether the government cuts lump-sum transfers or raises distortionary labor or consumption tax rates for financing. The former results in a larger aggregate expansion, but at the expense of a greater rise in inequality. As a result, the latter is relatively more beneficial for unskilled households. We find that the tax reform, when the consumption tax rate adjusts, leads to a Pareto improvement in terms of life-time welfare. For transition dynamics, monetary policy, in addition to the fiscal adjustments, matters. In particular, if monetary policy inflates away a portion of the public debt, the economy can avoid the short-run contraction that would arise otherwise.
    Keywords: Capital tax rate; Distortionary financing; Capital-skill complementarity; Inequality; Welfare implications
    JEL: E62 E63 E52 E58 E31
    Date: 2022–05–20
  3. By: Hayley Pallan (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper examines whether investors react to consumption taxes. Despite the near global adoption of VAT policies, relatively little is known regarding the investor response to VAT changes. In an event-study setup, using a new dataset of daily equity returns and precise dates of tax policy announcements across 20 countries between 1990 and 2014, I find heterogeneous responses: in advanced economies, equities react negatively to an announcement regarding a consumption tax increase, while in emerging markets, equities react positively to similar announcements. In emerging economies, the positive response to consumption tax increases is amplified in times of worsening macro-indicators, such as higher fiscal deficits and inflation. This result holds using both country-level index returns and firm-level equity returns. Furthermore, in emerging economies, the equity returns of high-debt firms respond more positively to VAT increases. Overall, the results suggest that investor sentiment in emerging economies is positive in response to VAT increases. This may be due to the expectation that fiscal prudence will prevent increases in interest rates, which would be particularly damaging for countries with deteriorating macro-conditions and firms with high levels of debt.
    Keywords: Fiscal Policies; Financial Markets; Macroeconomic Conditions; Corporate Debt
    JEL: H3 E6 G1
    Date: 2022–06–10
  4. By: Colin Davis (The Institute for the Liberal Arts, Doshisha University, JAPAN); Laixun Zhao (Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN)
    Abstract: We study how tax policy affects economic growth through entrepreneurs' choice of commercialization mode. Introducing both heterogeneous quality jumps and a leapfrog versus sell choice into the quality-ladders model, we show that entrepreneurs use high-quality innovations to leapfrog incumbent firms and become new market leaders, but sell low quality innovations to incumbents. Tax incentives that promote leapfrogging slow the rate of innovation. A numerical analysis concludes surprisingly that corporate taxes, capital gains taxes, and subsidies to market entry all harm welfare.
    Keywords: Innovation based growth; Heterogenous quality improvements; Innovation sales; Corporate tax; Capital gains tax; Market entry subsidy
    JEL: O31 O33 O43
    Date: 2022–06
  5. By: Rocco Caferra Author-Name-First Rocco (Department of Economics, Universitat Jaume I, Castellón, Spain and Department of Economics, Management and Business Law, University of Bari “Aldo Moro”, Italy); Alessandro Cascavilla Author-Name-First Alessandro (Department of Economics, Universitat Jaume I, Castellón, Spain and Department of Economics, Management and Business Law, University of Bari “Aldo Moro”, Italy); Andrea Morone (Department of Economics, Management and Business Law, University of Bari “Aldo Moro”, Italy)
    Abstract: This paper aims to shed lights on the relationship between intergenerational mobility and tax morale. We show that higher intergenerational mobility increases tax morale among European countries. This linkage is stronger and significant in countries where there is a commitment of the Government in guaranteeing more opportunities to citizens regardless of their familiar starting conditions (more defamiliarized countries). We further show that the positive linkage between intergenerational mobility and tax morale is significant only for individuals claiming for independence from their family context (i.e., those having less family ties). The results are quite robust across different estimation strategies, including an instrumental-variables methodology. This evidence remarks the importance to foster intergenerational mobility to build a more tax-compliant society.
    Keywords: Tax Evasion and Avoidance, Job, Occupational, and Intergenerational Mobility; Promotion
    JEL: H26 J62
    Date: 2022
  6. By: HOSONO Kaoru; HOTEI Masaki; MIYAKAWA Daisuke
    Abstract: We estimate the causal effects of a tax incentive for specific productivity-enhancing equipment that was introduced in 2014 for Japanese small and medium-sized enterprises. Using firm-level panel data, we obtain the following findings. First, the introduction of the tax incentive did not on average effectively increase the capital investment ratio of eligible firms, which could be due to the small number of firms using the incentives. Second, despite the first finding, the firms using the tax incentive increased their capital investment ratio and improved labor productivity more than the comparable firms did. Third, firms using the tax incentive did not increase capital intensity. Fourth, among the firms using the tax incentive, less cash-rich, smaller, and younger firms increased their capital investment ratio to a greater degree. These results show that the actual use of the tax incentive mitigates financial constraints in upgrading capital and improving labor productivity.
    Date: 2022–05
  7. By: António Afonso; José Alves
    Abstract: We assess the consequences of fiscal consolidation episodes on public sector efficiency (scores) for 35 OECD countries for the 2007-2020 period. We find that fiscal consolidations improve public sector efficiency and results are robust across efficiency models. Moreover, peripheral euro-area economies and economies with debt-to-GDP ratios between 60% and 90% are those whose public sector efficiency scores improve more when fiscal consolidation episodes occur. The evidence that fiscal consolidations enhance spending efficiency is an additional argument for fiscal consolidations, from a policy perspective.
    Keywords: fiscal consolidation episodes, government spending efficiency, panel data, OECD
    JEL: C23 D61 H21 E62 H63
    Date: 2022
  8. By: Go, Eugenia (World Bank); Hill, Sam (World Bank); Jaber, Maria Hanna (Asian Development Bank); Jinjarak, Yothin (Asian Development Bank); Park, Donghyun (Asian Development Bank); Ragos, Anton (Asian Development Bank)
    Abstract: What are the salient features of developing Asia’s tax revenues and public expenditures? How do these compare with other economies and how have they been affected by the coronavirus disease (COVID-19) pandemic? To analyze these issues we assemble data across economies drawing on a range of sources to maximize temporal and coverage of economies. We find that while tax revenues in developing Asia steadily rose in the 2 decades before COVID-19, they continued to lag behind high-income economies and some developing peers. The region relies on indirect taxes, particularly consumption taxes, creating a relatively efficient but less progressive tax structure. Alongside these lower tax revenues, government expenditures on education and health were comparatively modest. Substantial fiscal policy stimulus in response to COVID-19 comprised both tax and expenditure measures which, combined with the impact of the downturn on revenues, has severely weakened public finances in many developing Asian economies.
    Keywords: tax revenue; government expenditure; pandemic crisis
    JEL: E62 H12 H20 H30
    Date: 2022–06–21
  9. By: Alessandro Cascavilla Author-Name-First Alessandro (Department of Economics, Universitat Jaume I, Castellón, Spain and Department of Economics, Management and Business Law, University of Bari “Aldo Moro”, Italy); Jordi Ripollés (Institute of International Economics and Department of Economics, Universitat Jaume I, Castellón, Spain); Andrea Morone (Department of Economics, Management and Business Law, University of Bari “Aldo Moro”, Italy)
    Abstract: Despite the extensive literature examining determinants of tax morale, little is still known about the relationship between the associational involvement of citizens and their willingness to pay taxes. Given the insights offered by the social capital literature regarding the role of voluntary organisations in shaping civic engagement, this study sets out to empirically investigate how membership of different types of associations could influence individual tax morale in Europe. With this in mind, we exploit the information available in the fifth wave of the European Values Study (EVS, 2017) for citizens of 34 countries. Unlike previous studies on tax morale, we classify the types of voluntary associations depending on their potential to build out-group “bridging” or in-group “bonding” social ties. In this study, to carry out the classification, three alternative approaches are considered which are based on the socio-demographic heterogeneity within associations, the interconnections between them, and a combination of both. Our findings show that, after controlling for different individual characteristics and country-specific unobserved heterogeneity, those survey respondents involved in bridging associations tend to exhibit higher levels of tax morale, while the opposite is found for bonding associations. The results are quite robust for the three approaches and different estimation strategies, including an instrumentalvariables methodology. In view of our findings, policies aimed at incentivising volunteering activities in more connected associations and in those that include more heterogeneous members seem appropriate to promote the public spiritedness of citizens.
    Keywords: tax morale; social capital; volunteering
    JEL: C25 H26
    Date: 2022
  10. By: Clemens Fuest; Stefan Greil; Felix Hugger; Florian Neumeier
    Abstract: This paper uses micro data from country-by-country reporting of more than 3600 large multinational companies operating in 238 jurisdictions to analyze global profit shifting to avoid taxes. These companies report 7% of their global profits in jurisdictions with effective average tax rates below 5%, but only 0.4% of their employees and 3% of their tangible assets are located there. We find that globally, these companies reduce their tax burden by EUR 53 billion (15% of their overall tax payments) by shifting profits to low-tax countries. Losses of the US and Canada are slightly lower, the losses of the EU 27 member states are similar to the global average. 60% of the profit shifting is carried out by the 10% largest multinational companies. We show that taking into account non-linearities in profit shifting and subsidiaries reporting zero profits is of key importance for accurate estimates of profit shifting. We also investigate profit shifting channels and provide evidence suggesting that the location of IP and equity in low tax countries as well as the provision of loans to entities in high tax countries play a key role for tax planning.
    Keywords: : corporate taxation, tax avoidance, profit shifting, multinational enterprises, country-by-country reporting
    JEL: F23 H25 H26
    Date: 2022

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