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on Public Finance |
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Issue of 2024‒08‒12
nine papers chosen by |
| By: | Shafik Hebous; Andualem Mengistu |
| Abstract: | The international agreement on a corporate minimum tax is a milestone in global corporate tax arrangements. The minimum tax disturbs the equivalence between otherwise equivalent forms of efficient economic rent taxation: cash-flow tax and allowance for corporate equity. The marginal effective tax rate initially declines as the statutory tax rate rises, reaching zero where the minimum tax is inapplicable, and increases thereafter. This kink occurs at a lower statutory rate under cash-flow taxation. We relax the assumption of full loss offset; provide a routine for computing effective rates under different designs; and discuss policy implications of the minimum tax. |
| Keywords: | investment, minimum taxation, corporate tax reform, international taxation, rent tax |
| JEL: | H21 H25 F23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11147 |
| By: | Lassi Ahlvik; Matti Liski; Mikael Mäkimattila |
| Abstract: | This paper develops a mechanism design approach to study externalities and re-distribution. The mechanism screens individuals’ social weights to strike a balance among broad distributional objectives, incentives to work, and incentives to reduce externalities. The welfare-optimal allocation can be decentralized through income taxation, defining income-dependent externality payments. Two applications use individual-level administrative data on incomes, pollution measures, and financial burdens to demonstrate how population characteristics shape the optimal policy on carbon emissions. |
| Keywords: | Pigouvian taxation, optimal income taxation, inequality, climate change |
| JEL: | D82 H21 H23 Q54 Q58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11174 |
| By: | Francis Wong |
| Abstract: | Using high-frequency administrative data covering millions of US homeowners, I document three novel facts about homeowner responses to property tax increases driven by rising home values. First, non-migrating homeowners cut consumption, exhibit financial distress, and do not borrow against their higher home values. These responses run contrary to the predictions of frictionless models, in which homeowners should borrow to avoid costly adjustments. Second, heterogeneity analysis shows that consumption responses do not vary by liquidity, consistent with savings target behavior. In contrast, distress responses are concentrated among liquidity-constrained homeowners. Many homeowners report being debt averse and therefore unwilling to borrow in order to avoid illiquidity and distress. Third, tax hikes induce migration—partly by displacing illiquid homeowners—but do not accelerate neighborhood change. A simple welfare framework reveals that the largest costs of property taxes arise from financial distress among liquidity-constrained homeowners. |
| Keywords: | property taxes, housing, household finance |
| JEL: | H20 G51 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11185 |
| By: | Giese, Henning; Koch, Reinald; Sureth, Caren |
| Abstract: | This study analyzes the impact of tax complexity on the location of tax employees and tax risk. Using a hand-collected dataset of more than 7, 500 tax employees from 348 European-listed multinationals, we identify two types of firm-level costs associated with tax complexity-tax employees, and tax risk. We find that firms locate more tax employees in countries with greater tax complexity. This association is particularly pronounced for complexity in tax procedures. We also find that multinationals operating in countries with high tax complexity are associated with higher tax risk. The incremental tax risk vanishes for firms that locate more tax employees in countries with highly complex tax procedures, while we find no risk reduction from additional tax employees in countries with complex tax rules. Our results reveal that multinationals eliminate 25 percent of overall tax complexity-related tax risk through targeted location of tax employees. |
| Keywords: | tax complexity, tax complexity cost, tax department, tax employees, tax risk |
| JEL: | H25 H26 M12 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:arqudp:300270 |
| By: | Axelle Ferriere; Philipp Grübener; Dominik Sachs |
| Abstract: | Over the last decades, the United States has experienced a large increase in, both, income inequality and living standards. The workhorse models of optimal income taxation call for more redistribution as inequality rises. By contrast, living standards play no role for taxes and transfers in these homothetic environments. This paper incorporates living standards into the optimal income tax problem by means of non-homothetic preferences. In a Mirrlees setup, we show that rising living standards alter both sides of the equity-efficiency trade-off. As an economy becomes richer, non-homotheticities imply a fall in the dispersion of marginal utilities, which weakens distributional concerns but has ambiguous effects on efficiency concerns. In a dynamic incomplete-market setup calibrated to the United States in 1950 and 2010, we quantify this new channel. Rising living standards dampen by at least 25% the desired increase in redistribution due to rising inequality. |
| Keywords: | taxation, growth, non-homothetic preferences, redistribution |
| JEL: | E62 H21 H31 O23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11141 |
| By: | James R. Hines Jr.; Emily Horton |
| Abstract: | Interest paid by U.S. state and local bonds is tax-exempt, making these bonds attractive to investors – though a tax rule limits arbitrage opportunities by restricting associated interest expense deductions. Prior to 1986, U.S. banks were not subject to the interest deduction limitation, making banks preferred holders of tax-exempt debt. U.S. banks used tax-exempt debt to reduce their tax liabilities by roughly 20% in the 1950s and 45% in the 1960s, rising to as much as 80% by the early 1980s. Despite their special exemption, and in part because of their widespread holdings, banks did not benefit from investing in tax-exempt bonds, as competition between banks reduced bond yields to the point of investor indifference. The absence of a tax benefit from arbitrage appears not only in observed bond yields, but also in banks’ considerable unused potential for further tax reductions. After the Tax Reform Act of 1986 removed their special tax exemption, banks significantly reduced their holdings of tax-exempt debt, particularly among banks most severely impacted by the rule change. |
| JEL: | G21 H25 H74 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32647 |
| By: | BARRIOS Salvador (European Commission - JRC); DELIS Fotis (European Commission - JRC); LANDABASO ALVAREZ Mikel (European Commission - JRC) |
| Abstract: | We provide evidence on the differences in the effective tax rate by firm size, highlighting that effective tax rates tend to follow a bump-shaped curve, increasing from micro to small firms and then decreasing for medium to large firms. Our analysis, based on microdata from several EU countries, shows that both corporate and labour taxation follow this pattern. Econometric analysis reveals that a 1% increase in effective corporate taxation results in a 2.6% decrease in firm turnover growth, with new firms and micro firms being particularly affected. The negative impact of corporate taxation on firm growth is much larger for new firms compared to older firms, and this is especially pronounced in Spain, where a 1% tax hike leads to a turnover growth decrease of 8%. Examining the 2015 Spanish corporate tax reduction for new firms, we find that the reform's overall positive impact was insignificant for micro firms, suggesting the need for more targeted policies considering firm size, age, and ownership. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ipt:taxref:202407 |
| By: | İrem Güçeri; Xipei Hou; Jing Xing; Irem Guceri |
| Abstract: | We examine how investor-level tax incentives affect financing for start-ups using the introduction of a generous tax deduction for qualified angel and VC investment in China as a quasi-natural experiment. We find that the tax incentive increases funding for eligible start-ups, with stronger responses from larger and more experienced investors. The tax incentive leads to substitution between eligible and non-eligible investments. There is no evidence that the tax incentive lowers investment quality. We further show that the investor-level tax incentive encourages firm entry into affected industries, especially in cities more exposed to venture capital funds. |
| Keywords: | venture capital, angel investment, tax incentives, entrepreneurship |
| JEL: | G24 G32 H25 L26 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11180 |
| By: | Salla Kalin; Ilpo Kauppinen; Kaisa Kotakorpi; Jukka Pirttilä |
| Abstract: | We contribute to the literature on taxation and international mobility by estimating the impact of labour income taxation on the migration decisions of the entire working population in a high-tax source country, Finland. We find that the average domestic elasticity of migration with respect to the domestic tax rate is very small (around 0.0005). We also examine the income gradient of the semi-elasticity of migration, shown to be the key sufficient statistic in Lehmann et al. (2014). Our estimates indicate that the migration semi-elasticities are increasing for top earners, but remain small at least up to top permille of income earners. |
| Keywords: | taxation, migration |
| JEL: | J61 H31 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11165 |