Does formality improve micro-firm performance? Evidence from the Brazilian SIMPLES program

This paper exploits an extensive Brazilian micro-enterprise survey and the 1996 introduction of a business tax reduction and simplification scheme (SIMPLES) to examine three questions. First, do high tax rates and complex tax regulations really constitute a barrier to the formalization of micro-firms? Second, does formalization improve firm performance measured along several dimensions, including revenues, employment and capital stock? Third, what are the channels through which this occurs? We find that SIMPLES led to a significant increase in formality in several dimensions. Moreover, newly created firms that opt for operating formally show higher levels of revenue and profits, employ more workers and are more capital intensive (only for those firms that have employees). The channel through which this occurs is not access to credit or contracts with larger firms. Rather, it appears that the lower cost of contracting labor leads to adopting production techniques that involve a permanent location and a larger paid labor force.     

Income misattribution under formula apportionment

Alternatives to the current system of separate tax accounting, such as the proposed Common Consolidated Corporate Tax Base in Europe, would apportion a firm's worldwide profits using formulas based on the location of employment, capital or sales. This paper offers a new method of evaluating the accuracy of these apportionment rules and the ownership distortions they create. Evidence from European company accounts indicates that apportionment formulas significantly misattribute income, since employment and other factors on which they are based do a very poor job of explaining a firm's profits. For example, the magnitude of property, employment and sales explains less than 22% of the variation in profits between firms, and the prediction estimates from using such a formula exceed half of predicted profits 64% of the time, and exceed twice predicted income 11% of the time. As a result, the use of formulas rewards or punishes international mergers and divestitures by reallocating taxable income between operations in jurisdictions with differing tax rates. The associated ownership distortion is minimized by choosing factor weights to minimize weighted squared prediction errors, for which, based on the European evidence, labor inputs should play little if any role in allocation formulas. But even a distortion-minimizing formula creates large incentives for inefficient ownership reallocation due to the enormous variation in profitability that is unexplained by formulary factors, implying that significant resource allocation costs would accompany European adoption of formulary apportionment methods.     

Company taxation and tax spillovers: Separate accounting versus formula apportionment

It is observed in the real world that taxes matter for location decisions and that multinationals shift profits by transfer pricing. The US and Canada use so-called formula apportionment (FA) to tax corporate income, and the EU is debating a switch from separate accounting (SA) to FA. This paper develops a theoretical model that compares basic properties of FA to SA. The focal point of the analysis is how changes in tax rates affect capital formation, input choice, and transfer pricing, as well as on spillovers on tax revenue in other countries. The analysis shows that a move from SA to FA will not eliminate such spillovers and will, in cases identified in the paper, actually aggravate them.     

Optimal Taxation of Risky Human Capital*

In a two‐period life‐cycle model with ex ante homogeneous households, earnings risk, and a general earnings function, we derive the optimal linear labor tax rate and optimal linear education subsidies. The optimal income tax trades off social insurance against incentives to work. Education subsidies are not used for social insurance, but they are only targeted at offsetting the distortions of the labor tax and internalizing a fiscal externality. Both optimal education subsidies and tax rates increase if labor and education are more complementary, because education subsidies indirectly lower labor tax distortions by stimulating labor supply. Optimal education subsidies (taxes) also correct non‐tax distortions arising from missing insurance markets. Education subsidies internalize a positive (negative) fiscal externality if there is underinvestment (overinvestment) in education because of risk. Education policy unambiguously allows for more social insurance if education is a risky activity. However, if education hedges against labor‐market risk, optimal tax rates could be lower than in the case without education subsidies.     

Adverse selection in credit markets and regressive profit taxation

In many countries, taxes on businesses are less progressive than labor income taxes. This paper provides a justification for this pattern based on adverse selection that entrepreneurs face in credit markets. Individuals choose between becoming entrepreneurs or workers and differ in their skill in both of these occupations. I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. This gives rise to a corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a profit tax that is regressive relative to taxes on labor income restores the efficient occupational choice.     

总部集聚与工厂选址

总部经济的地理特征就是总部集聚。本文建立了一个全新的空间经济学模型,深入阐释总部与工厂分离的机制。模型分企业总部集聚和企业总部在南北地区均匀分布的两种情形,细致地探讨了跨地区运输成本、企业总部和工厂之间的交流成本以及地区间税收政策差异这三个因素相互影响、共同作用于工厂选址的机理。在其他条件不变的情况下,运输成本的降低将导致企业倾向于在总部集聚地区设立工厂;而无论运输成本高低,只要交流成本和外围地区劳动力工资上涨,更多的企业趋向于在总部集聚地区设厂;只有当外围地区的劳动工资降低或税率降低,更多的企业才趋向于在外围地区设厂。本文也再次验证了税收竞争的南部有利性与整体"竞次"(race to bottom)局面:一个地区的税收优惠政策不仅会对当地的企业产生影响,更会对总部集聚地区的其他企业利润产生负面影响。     

Job search and mobility in developing countries. Theory and policy implications

A labor market model is developed in which the formal sector is characterized by search frictions whereas the informal sector is competitive. We show that there exists a unique steady-state equilibrium in this dual economy. We then consider different policies financed by a tax on firms' profits. We find that reducing the unemployment benefit or the firms' entry cost in the formal sector induces higher job creation and formal employment, reduces the size of the informal sector but has an ambiguous effect on wages. We also find that an employment/wage subsidy policy and a hiring subsidy policy have different implications. In particular, the former increases the size of the informal sector while the latter decreases it.     

Multinationals,cross‐border acquisitions and wage dispersion

Abstract We examine the impact of cross‐border acquisitions on intra‐firm wage dispersion using a detailed Swedish linked employer‐employee data set including data on all firms and about 50% of the Swedish labour force with information on job‐tasks and education. Foreign acquisitions of domestic multinationals and local firms increase wage dispersion but so do also other types of cross‐border acquisitions. Hence, it is the acquisition itself rather than foreign ownership that increases wage dispersion. The positive wage effect is concentrated to CEOs and other managers, whereas other groups are either negatively affected or not affected at all.     

Inter‐Jurisdictional Competition for Firms*

Regions inhabited with an immobile population of disabled and able individuals compete to attract mobile firms that provide jobs. The redistributive goal of regional governments is to support the disabled, who cannot work. Able individuals may work, be involuntary unemployed because of frictions in the labor market, or choose to be voluntary unemployed. Labor force participation decisions depend on regional redistributive policies. Both the size of workforce and tax on firms affect profits and therefore, firms’ location decisions. Allowing regions to engage in tax competition may be efficient. If regions cannot tax firms, they compete by implementing inefficient redistributive policies.     

Migration and Wage‐setting: Reassessing the Labor Market Effects of Migration*

In this paper we employ a wage‐setting approach to analyze the labor market effects of immigration into Germany from 1980 to 2004. This enables us to consider labor market rigidities, which are prevalent in Europe. We find that the elasticity of the wage‐setting curve is particularly high for young workers. Moreover, natives and foreigners are imperfect substitutes. The wage and employment effects of immigration depend on the skill structure of the immigrant workforce. Because the foreign labor supply shift has mainly affected the high‐skilled labor market segment, the 4 percent increase of the workforce through immigration has not increased either aggregate or foreign unemployment.     

The macro-economic impact of changing the rate of corporation tax

This paper considers the impact of changes in the rate of corporation tax in Ireland affecting the business and financial services sector. A model is estimated that relates services exports and output to world activity, competitiveness and the rate of corporation tax. This model indicates that a reduction in the rate of corporation tax in the 1990s stimulated exports and, even allowing for profit repatriations by foreign firms and replacement of lost tax revenue, it resulted in an increase in domestic output. The increase in profitability suggests that some of the increased output involved relocation of profits to Ireland by multinational firms.     

Is the Optimal Labor Income Tax Progressive in a Unionized Economy?*

This paper concerns optimal nonlinear labor income taxation in an economy with union wage setting and endogenous hours of work. The purpose is to study the determinants of tax progression. We show that the optimal degree of progression of the labor income tax depends on the extent to which the government can influence the wage rate via tax policy as well as on its ability to redistribute income across individuals. In addition, the argument for progressive labor income taxation depends on whether hours of work are chosen by the employed themselves or the union.     

2012年度"浦山世界经济学优秀论文奖"评选公告

中国世界经济学会2012年度浦山世界经济学优秀论文奖(简称浦山奖)评选活动已启动.浦山奖是中国世界经济研究领域的最高奖项,2011年,被国家教育部列为与孙冶方经济科学奖等奖项同等重要的优秀学术成果奖.     

Taxation under oligopoly in a general equilibrium setting

Taxation under oligopoly is analyzed in a general equilibrium setting where the firms are large relative to the size of the economy and maximize the utility of their shareholders. Assuming that preferences are either identical and homothetic or identical and quasi‐linear, then the oligopoly model is an aggregative game, which greatly simplifies the comparative statics for the effects of taxation. This novel analysis of taxation leads to a number of counterintuitive results that challenge conventional wisdom in microeconomics. A lump‐sum tax may increase the price of the oligopolistic good and decrease welfare whereas a profits tax may decrease the price of the oligopolistic good and increase welfare. A profits tax is shown to be superior to a lump‐sum tax. Furthermore, in line with conventional wisdom, total tax revenue is always higher with an ad valorem tax than with a specific tax that leads to the same price for the oligopolistic good.     

Worker Absenteeism in Search Equilibrium*

In this paper we introduce a general equilibrium model of search unemployment that incorporates absence from work as a distinct labor force state. Absenteeism is driven by random shocks to the value of leisure that are private information to the workers. Firms maximize profits while recognizing that the compensation package may affect the queue of job applicants and the absence rate. The analysis provides results concerning the effects of social insurance benefits and other determinants of workers' and firms' behavior. The normative analysis identifies externalities associated with firm‐provided sick pay and examines the welfare implications of alternative policies.     

Shouldn't Physical Capital Also Matter for Multinational Enterprise Activity?

The foreign direct investment (FDI) literature has generally failed to find strong systematic evidence of “vertical” motivations in bilateral aggregate FDI and foreign affiliate sales (FAS) data, despite recent evidence of vertical FDI in firm‐level data. Moreover, a Bayesian analysis of the empirical determinants of FDI (and FAS) flows reveals that the parent country's physical capital per worker has a strong positive effect on FDI alongside typical gravity‐equation variables; however, this variable is ignored in the knowledge‐capital (KC) model and most empirical work. We address these two puzzles by introducing relative factor endowment differences into the three‐factor, three‐country knowledge and physical capital extension of the 2 × 2 × 2 KC model. Using a numerical version of our model, we show that horizontal and vertical multinational enterprises' (MNEs') headquarters surface in different parts of the Edgeworth box relating the parent country's skilled labor share relative to its physical capital share (of the parent's and host's endowments). The key economic insight is that horizontal MNE headquarters will be relatively more abundant than vertical MNE headquarters in countries that are abundant in physical capital relative to skilled labor, because of the multi‐plant (single‐plant) structure of horizontal (vertical) MNEs—assuming plants (headquarters) use physical capital (skilled labor) relatively intensively in their setups. The theoretical relationships suggest augmenting empirical FAS gravity equations with (polynomials of) the parent's skilled labor share alongside the parent's physical capital share to explain in aggregate bilateral data the coexistence of horizontal and vertical FAS. The theoretical and empirical results shed light on the positive effect of parent's physical capital share on FAS flows, but also suggest that MNE headquarters may be prominent in parent countries with relatively high and low skilled labor shares—once physical capital is accounted for—a result not suggested by the two‐factor KC model.     

Migration,Unemployment, and Skill Downgrading

In this paper, we analyze the labor market impacts of immigration under flexible and rigid labor market regimes. A general equilibrium framework is developed, accounting for skill heterogeneity and labor market frictions, where unemployed medium‐skilled manufacturing workers are downgraded into low‐skilled service jobs, while low‐skilled service workers might end up unemployed. The analytical analysis shows that medium‐skill immigration decreases low‐skilled unemployment under the flexible regime, indicating a complementarity effect, while the rigid regime induces a substitution effect, leading to low‐skilled unemployment. Moreover, it leads to wage polarization. In a numerical analysis, the economic effects of different migration scenarios are quantified.     

Globalization and labor market institutions: International empirical evidence

A widespread concern is that labor market institutions erode in the course of globalization, which, in turn, decreases employment and wages. By using panel data and cross-sectional data, I investigate the influence of globalization on labor market regulation. I use the indicators of labor market institutions by Gwartney et al. (2012) and the KOF indices of globalization. To deal with potential reverse causality, I employ a system GMM panel estimator and use a constructed trade share as proposed by Frankel and Romer (1999) as an instrumental variable for globalization in cross-sectional models. The results do not show that globalization induced labor market deregulation.     

Respect and relational contracts

Assuming that people care not only about what others do but also on what others think, we study respect in a labor market context where the length of the employment relationship is endogenous. In our three-stage gift-exchange experiment, the employer can express respect by giving the employee costly symbolic rewards after observing his level of effort. We study whether symbolic rewards are used by the employers mainly to praise employees or as a coordination device to build relational contracts by manipulating the balance between labor demand and supply in the market. We find that a high proportion of long-term relationships have been initiated by the assignment of symbolic rewards. However, the assignment of symbolic rewards decreases when it becomes clear that the relationship is durable, suggesting that employers mainly use symbolic rewards as a coordination device to initiate relational contracts. Compared to the balanced market condition, assigning symbolic rewards in initial relationships is less likely when there is excess demand in the market and more likely when there is excess supply, i.e., when the relationship is more valuable. Receiving symbolic rewards increases the employees’ likelihood of accepting to continue the relationship with the same employer. It also motivates them to increase their effort further but only when the market is balanced. Overall, the ability to assign symbolic rewards does not give rise to higher profits because it is associated with lower rents offered to the employees on average, leading to lower effort levels.