Replacing Corporate Income Tax with a Cash Flow Tax

We design a parsimonious cash flow tax for Australia and estimate revenue effects. It allows immediate deduction of all capital expenditures, denies deductions of interest payments, and compensates negative cash flows at the same rate and time as it taxes positive cash flows. It allows taxpayer timing choice on implementation over 10 years. It has incentive effects comparable to lowering the corporate income tax rate to zero. It removes distortions that artificially favour debt over equity, short- over long-term investments, rents over competitive returns, large, established over small and new businesses, and conventional over innovative investments. It closes international tax evasion loopholes. Its spur to investment and timing of revenue impacts favours implementation in recession.     

Some aspects of the taxation of capital gains

The analysis of the effects of capital gains taxation requires a careful modelling both of the details of the tax code and the imperfections in the capital market. Under the standard assumptions concerning perfect capital markets and under the standard idealizations of the tax code, there are several strategies by which rational investors can avoid note only all taxes on their capital income, but also all taxes on their wage income; these strategies leave individuals' consumption and bequests in each state of nature and at each date unchanged from what they would have been in the absence of taxes. Although certain detailed provisions of the tax code may limit the extent to which rational investors can avail themselves of these tax avoidance activities, there are ways, in a perfect capital market, by which the effects of these restrictions can be ameliorated. Accordingly, any analysis of the effects of capital taxation must focus on imperfect capital markets.If individuals face limitations on the amounts which they can borrow and/or if there are limitations on short sales, then under some circumstances there is a locked-in effect (individuals do not sell securities which they would have sold in the absence of taxation); but under other circumstances individuals are induced to sell securities that they otherwise would have held, in order to take advantage of the asymmetric treatment of short-term losses and long-term gains. A policy of realizing gains as soon as they become eligible for long term treatment dominates the policy of postponing the realization of capital gains, provided the gains are not too large.A simple general equilibrium model is constructed within which it is shown that the taxation of capital gains may increase the volatility of asset prices, and lead individuals not to trade when they otherwise would. While the analysis casts doubt on the significance of the welfare losses resulting from these exchange inefficiencies, there are circumstances in which the tax leads to production inefficiencies, e.g. terminating projects at other than the socially optimal date.Finally, we argue that the focus of some recent policy debates on the short-run revenue impact of a decrease in the tax rate on capital gains is misplaced: even when the short-run revenue impact is positive, consumption may increase (thus exacerbating inflationary pressures) and private savings may decrease (thus leading to a lower level of investment in the private sector). Moreover, there is some presumption that the long-run revenue impact is negative.Our analysis has some important implications for empirical research. In particular, it suggests that the impact of the tax is not adequately summarized by a single number, such as the ‘effective tax rate’ representing the average ratio of tax payments to capital gains. Moreover, the impact of the tax cannot be assessed by looking only at reported capital gains and losses.     

资本结构特征影响因素文献综述

资本结构理论和实证研究文献表明盈利能力、公司规模、非债务税盾、成长性、自由现金流量、资产担保价值、经营风险等公司特征因素影响资本结构的选择,对影响资本结构的上述七个特征因素进行了综合回顾及评价。国内外文献中每个因素对资本结构的影响不尽相同。在中国,盈利能力、非债务税盾、成长性与资本结构负相关,而公司规模、自由现金流量、资产担保价值和经营风险与资本结构正相关。     

Factor Taxation, Income Distribution and Capital Market Integration

This paper addresses the optimal mix of capital and wage taxation when policymakers maximize the political support of workers and capitalists, subject to a fixed revenue requirement. Capital market integration increases the efficiency costs of a tax on capital but simultaneously changes the political equilibrium through its effect on the distribution of factor incomes. These distributional effects are directly opposed in the capital importing and the capital exporting region. While the capital tax rate will always be lowered in the capital importing region, the tax rate in the exporting country will rise when political resistance to market-induced changes in the distribution of income is sufficiently high.     

Employment- and growth effects of tax reforms

Since the mid-1990s almost all OECD countries have engaged in fundamental reforms of their tax systems. There is a trend towards higher social security contributions and lower tax rates on personal and corporate income. This paper explores whether these tax policy measures are effective means for reducing unemployment and accelerating economic growth. Using a Pissarides type search model with endogenous growth, we analyze how savings and the incentive to create new jobs are affected by revenue-neutral tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, cutting the capital income tax (reducing the double taxation of dividend income) financed by a higher payroll tax turns out to be superior, such a policy mix fosters both employment and growth. Most other tax reforms imply a trade-off between employment and growth.     

Capital income taxation,tax criteria,and intergenerational welfare

In a two-period overlapping-generations model, residence criteria are shown to be optimal with lump-sum transfers to the younger generation in a dynamically efficient open economy even if all wage income, corresponding to rent income under exogenous labor supply, is not taxed away. When tax revenues are also distributed to the older generation — which indeed may be desirable for short-term intergenerational welfare distribution reasons — a weighted average rule is derived for optimal international taxation. The taxation of domestic savings income follows the inverse elasticity rule in respect to savings and, surprisingly, higher investment elasticity increases the tax level. Finally, for a small open economy and for large identical economies, tax competition with a mixed scheme of residence-based taxes and source-based subsidies yields the same tax policy as tax cooperation with no restrictions on the domestic and international capital income tax instruments.     

居民储蓄变动与经济增长及银行业之间关系研究

针对当前各界给予储蓄增长率持续降低的关注,本文认为,储蓄的增长本身与经济增长率之间存在并不十分确定的正向促进关系,其取决于经济所处的发展阶段以及银行的信用创造能力。在当前普遍强调储蓄下降对经济增长所起的负面作用情况下,对银行业的健康发展确实具有至关重要的作用,具体涉及到兑付风险、减少收入以及对股份制银行和上市银行的资本金影响。本文在实证检验了国内储蓄率变动的状况、原因之后,尝试从金融产品和国家税收政策等方面提出促进储蓄的对策建议。     

Capital Tax Competition and Cooperation with Endogenous Capital Formation

Incorporating consumption–savings choices under a general concave utility function and hence an endogenous capital supply into a model of capital tax competition, we re‐investigate Nash equilibrium and compare it with the optimum under cooperative tax policy. In contrast to the case of fixed capital supply, it is shown that if savings sufficiently increase with the interest rate, a Nash equilibrium may be more efficient than a cooperative tax policy. Therefore, the distortionary effects of capital supply are important to issues of tax policy coordination.     

The optimal taxation of risky capital income: An elasticity rule

Should risky capital income be taxed like safe income or should tax rates be differentiated? The question is analyzed in a 2-assets model of portfolio choice. Flat tax rates are chosen in order to maximize the investor's expected utility from terminal wealth subject to an expected tax revenue constraint. If lump-sum taxes are not available, optimal tax rates are characterized by an elasticity rule: The relative change in the risk remuneration should be equal to the inverse of the product of two elasticities. One is the output elasticity of capital. The other is the demand elasticity for risky investments with respect to a revenue preserving tax variation.     

MONETARY EXPANSION AND PRODUCTIVE PUBLIC EXPENDITURE IN A CASH‐IN‐ADVANCE ECONOMY*

Using a dynamic optimization model that incorporates a cash‐in‐advance constraint on both consumption and investment and productive public capital financed by a lump‐sum tax and seigniorage, this paper analyses the steady‐state effects of an increase in the inflation rate (the money growth rate) on output, private capital and welfare. The effects are negative at high inflation rates. However, at low inflation rates, the effects depend on the amount of lump‐sum tax revenue collected and therefore are either positive or negative.     

Capital tax,minimum wage,and labor market outcomes

Often an increase in the minimum wage is accompanied by a reduction in the capital tax. This paper analyzes the effects of interactions between the minimum wage and the capital tax in the general equilibrium framework. The analysis is conducted in an inter-temporal search model in which firms post wages. A (binding) minimum wage provides a lower support for the distribution of wages. The paper finds that the interaction of these two policy instruments significantly modify labor market outcomes and welfare cost. In the presence of a binding minimum wage, a decrease in the capital tax leads to an increase in wage dispersion. In contrast, when it is not binding, a lower capital tax may reduce the dispersion in wages. A binding minimum wage magnifies the positive effects of a lower capital tax on labor supply, employment, and output. It also enhances the welfare cost of capital tax. A policy change which involves an increase in the minimum wage and a fall in the capital tax such that employment level remains constant increases welfare and output.     

Investment and technological choice in a right-to-manage model

We analyze the interactions between investment and local wage bargaining in a putty-clay model where the investment decision commits the firm to a particular capital intensity. This technological precommitment is used strategically in order to manipulate the bargaining outcome. We show that this strategic behavior induces a nonmonotonic relationship between the capital and labor demands of the firm and most of its environmental parameters (e.g., the bargaining power of the union, its minimum wage requirement, the capital cost). The results we obtain in our putty-clay framework thus contradict several conclusions of the standard literature on wage bargaining and investment.     

An analysis of capital gains tax-induced earnings management

Since 1974, there have been four changes in the corporate tax rate on net capital gains. In each instance a firm had an incentive to alter its capital gains taking in order to maximize its after-tax cash flows. This paper presents a longitudinal analysis of firms' responses to the four rate changes and in doing so provides additional evidence regarding tax-induced earnings management. Most studies analyze firms' responses to tax law change in one tax act (e.g., The Tax Reform Act of 1986), yet firm response to one act might not be the typical response. Results from this study confirm such a phenomenon. The results also provide additional evidence on the association of firm characteristics with tax-induced earnings management.     

Dynamic elasticities of tax revenue: evidence from the Czech Republic

Tax revenue elasticities with respect to tax bases are key parameters for the modeling of public finances. Yet the existing studies estimating these elasticities for emerging countries disregard the effects of tax reforms on tax revenue, which renders their estimates inconsistent. We introduce a framework for estimating both short- and long-run tax revenue elasticities using quarterly data adjusted for the effects of reforms. Our results suggest that the long-run elasticities in the Czech Republic are 1.4 for wage tax, 0.9 for value added tax, 1.7 for profit tax and 1 for social security contributions. The adjustment process for value added tax and social security contributions is fast, but for the remaining two categories, it is important to distinguish between the short- and long-run elasticities: the initial response of revenue to changes in the bases is weak. In the case of wage tax it takes half a year for the elasticity to surpass unity.     

Modeling the fiscal costs and benefits of alternative treatment strategies in the United Kingdom for chronic hepatitis C

Background: Hepatitis C (HCV) infection causes substantial direct health costs, but also impacts broader societal and governmental costs, such as tax revenue and social protection benefits. This study investigated the broader fiscal costs and benefits of curative interventions for chronic Hepatitis C (CHC) that allow individuals to avoid long-term HCV attributed health conditions.

Methods: A prospective cohort model, assessing the long-term fiscal consequences of policy decisions, was developed for HCV infected individuals, following the generational accounting analytic framework that combines age-specific lifetime gross taxes paid and governmental transfers received (i.e. healthcare and social support costs). The analysis assessed the burden of a theoretical cohort of untreated HCV infected patients with the alternative of treating these patients with a highly efficacious curative intervention (ledipasvir/sofosbuvir [LDV/SOF]). It also compared treating patients at all fibrosis stages (Stages F0–F4) compared to late treatment (Stage F4).

Results: Based on projected lifetime work activity and taxes paid, the treated cohort paid an additional £5,900 per patient compared to the untreated cohort. Lifetime government disability costs of £97,555 and £125,359 per patient for treated cohort vs no treatment cohort were estimated, respectively. Lifetime direct healthcare costs in the treated cohort were £32,235, compared to non-treated cohort of £26,424, with an incremental healthcare costs increase of £5,901 per patient. The benefit cost ratio (BCR) of total government benefits and savings relative to government treatment costs (including LDV/SOF) ranged from 1.8–5.6. Treating patients early resulted in 77% less disability costs, 43% lower healthcare costs, and 33% higher tax revenue.

Conclusion: The ability to cure Hepatitis C offers considerable fiscal benefits beyond direct medical costs and savings attributed to reduced disability costs, public allowances, and improved tax revenue. Changes in parameters, such as productivity, wage growth, and tax rates, can influence the conclusions described here.     

Constrained Inefficiency and Optimal Taxation with Uninsurable Risks

When individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how? In a two‐period general equilibrium model with production, we derive a decomposition formula of the welfare effects of these taxes into insurance and distribution effects. This allows us to determine how the sign of the optimal taxes on capital and labor depend on the nature of the shocks and the degree of heterogeneity among consumers' income, as well as on the way in which the tax revenue is used to provide lump‐sum transfers to consumers. When shocks affect primarily labor income and heterogeneity is small, the optimal tax on capital is positive. However, in other cases a negative tax on capital is welfare‐improving.     

Tax competition with parasitic tax havens

We develop a tax competition framework in which some jurisdictions, called tax havens, are parasitic on the revenues of other countries, and these countries use resources in an attempt to limit the transfer of tax revenue from capital taxation to the havens. We demonstrate that the full or partial elimination of tax havens would improve welfare in non-haven countries. We also demonstrate that the smaller countries choose to become tax havens, and we show that the abolition of a sufficiently small number of the relatively large havens leaves all countries better off, including the remaining havens. We argue that these results extend to the case where there are also taxes on wage income that involve administrative and compliance costs.     

Capital and Consumption Tax Reforms in a Small Open Economy

The effects of a reform in capital and consumption taxes on private welfare and government tax revenue are examined for a small open, capital‐importing economy. A trade‐off between private welfare and tax revenue is encountered in maximizing social welfare. Nonetheless, lowering capital taxes and raising consumption taxes can increase both private welfare and tax revenue if the initial tax rates are not optimal. In addition, a tax reform by this fashion is a likely response to a rise in the foreign rate of return on capital.     

Land-Tax, Transfer and Growth in an Endogenously Growing Economy with Overlapping Generations

In this paper we investigate the effect of a tax on land rent on the growth rate of capital in a growing economy with overlapping generations. A tax on land rent has a potential to increase the growth rate of capital. If the model is extended to allow the tax revenue to be refunded to individuals, a tax on land rent may deter growth to the extent that the tax revenue is transferred to the older generation.
JEL Classification numbers: H31, O41.     

Dynamic scoring of tax reforms in a small open economy model

We examine dynamic revenue effects of a permanent tax cut on labor and capital income using a small open two-sector dynamic general equilibrium model. We use a dynamic scoring technique to calculate long-run as well as transitional effects on fiscal revenue when a tax cut is financed by either a lump-sum tax or consumption tax. We show that the revenue loss from an income tax cut becomes substantially smaller when agents can use international financial markets compared to the case of the closed economy. Responses of tradable and nontradable sectors to the capital income tax cut display a stark contrast in both long-run equilibrium and transitional dynamics due to different factor intensities. Capital income tax cut in the tradable sector is the most efficient policy instrument in terms of minimizing fiscal revenue loss. These simulation results suggest that fiscal sustainability issue when implementing a tax cut could be overstated.