Tax Evasion,Corruption and Market Entry

We analyze the impact of tax policy on the market entry of firms in the presence of corruption and tax evasion. In a world with corruption, firms must bribe corrupt officials to enter the market. For a given level of bribes, higher tax rates and stricter enforcement of taxation decrease tax evasion but typically reduce market entry. However, when the level of bribes reacts to tax policy, higher taxes and stricter enforcement of taxation can have a double benefit. Up to a certain threshold, for which we develop a simple rule, stricter enforcement increases market entry and reduces tax evasion.     

Taxation,corruption, and growth

We build an endogenous growth model to analyze the relationships between taxation, corruption, and economic growth. Entrepreneurs lie at the center of the model and face disincentive effects from taxation but acquire positive benefits from public infrastructure. Political corruption governs the efficiency with which tax revenues are translated into infrastructure. The model predicts an inverted-U relationship between taxation and growth, with corruption reducing the optimal taxation level. We find evidence consistent with these predictions and the entrepreneurial channel using data from the Longitudinal Business Database of the US Census Bureau. The marginal effect of taxation for growth for a state at the 10th or 25th percentile of corruption is significantly positive; on the other hand, the marginal effects of taxation for growth for a state at the 90th percentile of corruption are much lower across the board. We make progress towards causality through Granger-style tests and by considering periphery counties where effective tax policy is largely driven by bordering states. Finally, we calibrate our model and find that the calibrated taxation rate of 37% is fairly close to the model׳s estimated welfare maximizing taxation rate of 42%. Reducing corruption provides the largest potential impact for welfare gain through its impact on the uses of tax revenues.     

Corporate tax and location choice for multinational firms

This article examines the effects of corporate tax on these location decisions of newly established multinational subsidiaries across 26 European countries over an 8-year period. We contribute to the existing literature by examining the effects of a non-linear response of firm location decisions to changes in the tax rate. We also show that there are large variations in the sensitivity to tax rates across sectors and firm size groups. In particular, financial sector firms are more than twice as sensitive to changes in corporation tax rates relative to other sectors. Our baseline result is a finding that a 1% increase in the statutory or policy rate of corporation tax would lead to a reduction in the conditional location probability of 0.68%. Using the effective average tax rate, the marginal effect implies a reduction in the location probability of 1.15% following a 1% increase in the tax rate. Although overall tax has the expected negative effect on location probability, the marginal effect of an increase is lower at higher rates of tax.     

Testing for the Ratchet Effect in the R&D Tax Credit

Many countries have implemented the R&D tax credit to encourage firms’ R&D spending. The design of the tax credit is important for its effectiveness. Some countries such as Korea, Taiwan, Japan, France and the US have employed an incremental R&D tax credit system. The US case that made a major change in its design from the moving average base to the fixed base in calculating the credit provides us with a natural experiment to measure the effectiveness of the tax credit from the perspective of the ratchet effect. By applying an endogenous switching regression model to US manufacturing firm data, we attempt to measure the ratchet effect of R&D credit on firms’ R&D investment. According to the empirical results, the R&D tax credit policy has been effective with the price elasticity, –1.818, for the qualified firms, and the re-design of R&D credit improved the positive impact of R&D credit. This provides some policy implication for those countries that adopted an incremental credit system. In addition, our result suggests the existence of selectivity bias in the previous literature.     

How does petty corruption affect tax morale in Sub-Saharan Africa?

Revenues from taxation gain in importance to finance economic development in Sub-Saharan Africa. One obstacle to enhancing the willingness to remit taxes can be the extortion of bribes by public officials. Using micro-level data from the Afrobarometer, we show that petty corruption erodes tax morale. The effect on tax morale is more severe in countries and regions where fewer people are affected by petty corruption and becomes insignificant if extortion of bribes is particularly prevalent. Differing levels of civic participation and potential access to tax funded services are also found to induce heterogeneous reactions to corruption experience. Applying a mediation analysis, we demonstrate that petty corruption not only has a direct effect on tax morale but also diminishes confidence in tax authorities and therefore affects tax morale indirectly. The harmful effects of corruption experience, however, operate mainly through a generally lowered inclination to uphold high levels of tax morale.     

减税能否提高企业生产效率?——基于西部大开发准自然实验的研究

降低实体经济企业成本,提高其经济效率,是我国供给侧改革的核心内容,而减税政策是重中之重.文章以西部大开发作为准自然实验,基于1998-2007年工业企业微观数据,使用双重差分法研究了减税对实体经济的影响.研究发现,减税政策能够刺激实体经济发展,名义税率每下降1%,企业生产效率平均提高0.38%-0.75%.减税对企业生产效率的影响既有直接效应也存在间接效应.直接效应表现为减税有利于存续企业生产效率的提升,间接效应则表现为减税可以刺激更多的创业活动,而新进入企业比存续企业具有更高的生产效率.异质性检验表明,小企业比大企业对于减税政策更加敏感,而且减税对生产效率的影响随着时间推移先增加后减小,存在长期收敛效应.文章为我国减税政策如何影响企业生产效率提供了经验证据,对于今后税收政策的制定具有重要的理论与实践意义.     

Can corruption encourage clean technology transfer?

We study the impact of environmental regulation on the transfer of a clean technology where bureaucrats are needed for government intervention. In the absence of corruption, when environmental taxes are low, a technology transfer always takes place and it increases total outputs, but may lead to higher pollution levels. However, when corruption is possible, a firm with a dirty technology may choose to bribe a corruptible bureaucrat who will underreport the actual level of emissions, thereby hindering the transfer of clean technology. We show that a less strict anticorruption policy may lead to more bribing, but encourage technology transfers. Moreover, an environment-oriented government would set a deterrent environmental tax to reduce pollution, while an output-oriented government would set a minimum tax rate to eliminate corruption and induce technology transfers. However, a balanced government would tolerate corruption when the cost of bribing is low and the clean technology is sufficiently efficient.     

CAN STATE TAX POLICIES BE USED TO GROW SMALL AND LARGE BUSINESSES?

The existing literature studying the relationship between small business activity and U.S. state tax policy has focused primarily on a few measures of small business. We expand this literature by estimating the effect of state tax policy on small businesses by using broader measures of small business activity using a longitudinal dataset for the U.S. states. We also estimate the relationship between state tax policy and large business activity. Results provide evidence that state tax policy can influence small business firm, establishment, payroll, and employment growth in important ways but provide limited evidence that such policy significantly influences large business growth. (JEL H2, H7, R1)     

The nexus of white collar crimes: shadow economy,corruption and uninsured motorists

This article empirically examines the nexus of three white collar crimes: shadow economy, corruption and uninsured motorists. Whereas the shadow economy–corruption linkage has been studied, the linkages with uninsured motorists have not been formally studied. Results, based on US data and accounting for possible bidirectional causalities, show complementarity between shadow economy and corruption and between uninsured motorists and the shadow economy. The magnitude of the impact of uninsured motorists on the shadow economy is greater than that of corruption. In other findings, shadow economy was lower in most prosperous states and in states that did not impose a sales tax.     

Effects of regulatory burden and corruption on firm performance: Evidence from Moldova

Firms in Moldova face a high level of regulatory burden, as proxied by the number of inspections by public authorities. At the same time, they face high levels of corruption. We examine the effect of frequent inspections on four measures of firm performance: labour and total factor productivity, and levels of tangible and intangible assets. We also investigate how corruption affects the relationship between inspections and firm performance. We perform panel data analysis using firm-level administrative data and survey data from Moldova in 2005–2015. The results show that inspections and corruption each affect firm productivity negatively, but corruption moderates the negative effect of inspections. We also find that inspections and intangible assets are positively correlated, but this correlation is weaker for higher levels of corruption. Finally we examine whether these results differ by industry, firm size and ownership types. Inspections and corruption affect medium and large firms, and state-owned enterprises differently from micro and small firms and private firms respectively.     

Corporate tax policy and heterogeneous firm innovation: Evidence from a developing country

This paper adds to the literature by identifying the causality of corporate tax policy on firm innovation in a developing country. We exploit the China’s 2006 corporate income tax base reform to integrate the tax system between foreign-invested and state/collective-controlled firms as a natural experiment. The difference-in-differences strategy documents a positive effect of corporate tax deduction on firm patenting. The effect is particularly significant if a firm is of larger size or locates in eastern provinces. We also examine possible channels behind the findings, including changes in R&D and capital investment, intangible assets, financial constraints, and new product sales.     

The contractionary effects of tax shocks on productivity: An empirical and theoretical analysis

I analyze the effects of tax policy changes on US Total Factor Productivity. VAR estimates show that permanent and exogenous tax increases have strong, permanent, and negative effects on TFP which represent about 80% of change in output following the tax increase. I then build a DSGE model which has learning-by-doing and endogenous TFP evolution. The benchmark model is able to replicate the empirical impulse responses. However, when I calibrate the model as in the literature, the effect of taxes on TFP is substantially less elastic than in the data. I argue that this divergence may arise because tax changes labeled as exogenous can give spurious results or because of a mis-specified model.     

The Effect of Tax Convexity on Corporate Investment Decisions and Tax Burdens

This paper examines the effect of convexity in the corporate tax schedule on corporate investment decisions and tax burdens. Using a contingent‐claims model, we show that greater tax convexity results in (i) earlier exit, (ii) delayed investment (except for small entry cost), and (iii) reduced corporate risk taking (except for small entry cost and unfavorable operating conditions). Also, the effective tax burden is an increasing function of tax convexity. The convexity of the tax schedule has a nontrivial impact on corporate investment decisions and investment levels. These results are relevant for economic growth, which depends (at least partly) on investment levels, and tax policy makers should be aware of these effects when making adjustments that might impact the convexity of the corporate tax schedule.     

Ambient-based pollution mechanisms: A comparison of homogeneous and heterogeneous groups of emitters

Over the last two decades, ambient-based tax mechanisms have been offered as a potential solution to the problem of nonpoint source water pollution. Previous theoretical analyses suggest that the performance of ambient-based tax mechanisms does not depend on firm characteristics, such as size, whilst policy discussions advocate that such mechanisms are best suited for regulating relatively homogeneous firms. Using controlled laboratory experiments, we provide empirical evidence that the distribution of firm sizes does have a significant impact on observed group decision making and further that heterogeneity has the potential to generate both some relatively desirable outcomes as well as some outcomes that are not attractive. These results suggest that richer theoretical models that capture important strategic interactions and social preferences are needed to better describe laboratory behavior and, by extension, behavior in potential policy settings.     

Stylised facts and other empirical evidence on firm dynamics,business cycle and growth

In this paper, we bring together, in a systematised fashion, the scattered empirical evidence relating firm dynamics with both short-run and long-run macroeconomic dynamics. There are numerous studies that focus on firm-level data while controlling for macroeconomic conditions. From these studies a fairly robust set of empirical regularities pertaining to entry, exit, growth and the size distribution of firms has emerged. However, the literature that focuses explicitly on the interplay between firm dynamics and the business cycle is roughly confined to the US experience and to the cyclical properties of firm entry and exit, while the studies about the relationship between firm dynamics and economic growth are limited and unsystematic. We also give a brief account of the most recent theoretical literature on firm dynamics and macroeconomic dynamics, and try to relate it to the empirical findings.     

Tax Competition in Vertically Differentiated Markets with Environmentally Conscious Consumers

This paper analyses the effects of tax competition on environmental product quality, pollution and welfare in a two-country, vertically differentiated, international duopoly, in which consumers are environmentally conscious. The firm in each country chooses first the environmental quality of its product (which reflects the emissions generated in the production process) and then the price. In equilibrium one country will be more polluted than the other because firms choose different levels of environmental quality of their products. We find that a country’s optimal commodity tax is higher if the domestic firm is the more polluting supplier. Furthermore, non-cooperative commodity tax rates are inefficiently high in equilibrium. This is because, in this framework with environmentally aware consumers, commodity taxes affect the choice of firms regarding their emissions. Therefore, a domestic tax reduction not only raises the profits of the foreign firm but also lowers its emission levels, resulting in higher welfare for the other country. We also analyse the optimal cooperative and non-cooperative commodity and emission taxes with border tax adjustments. With these two policy instruments available, commodity taxes are higher.     

Anticorruption reforms,tax evasion,and the role of harassment

We examine the impact of anticorruption reforms on tax evasion when corruption and potentially harassment are endemic among tax auditors. We find that the threat of harassment may counterintuitively boost the impact of such anticorruption reforms on tax evasion and also eliminate corruption. Specifically, a moderate anticorruption policy can discontinuously reduce tax evasion to a level even below that under no corruption. Further strengthening of such policy can nonetheless prove counterproductive and increase tax evasion. On the contrary, in the absence of harassment, a moderate anticorruption reform induces higher tax evasion and sustenance of bribery. In this case, only a large reform can reduce tax evasion and eliminate corruption.     

Host-country policy – commitment or no-commitment: a theoretical analysis

This paper develops a model of foreign entry strategy and examines welfare of the host-country under two situations - (i) where host-country government commits to the tax policy, (ii) where host-country government does not commit to the tax policy. It turns out that under the non-committed government policy the foreign firm does not prefer to hold equity share in the domestic project. The host-country welfare, however, is more under the committed government policy than the non-committed government policy when the foreign firm has sufficiently higher bargaining power. The possibility of technology choice by the foreign firm reduces the range of bargaining power of the foreign firm over which the host-country welfare is more under the committed policy compared to the non-committed policy.     

The choice and timing of foreign direct investment under uncertainty

This paper sheds new light on why timing and entry mode should be considered simultaneously in the international investment literature. We derive the profit levels at which it is optimal to switch from exporting to setting up a wholly owned subsidiary, creating a joint venture, or licensing production to a local firm. The preferred entry mode depends on uncertainty about future profits, tax differentials between the home and the foreign country, the cost advantages of local firms, institutional requirements, and the degree of cooperation between partners in a joint venture.     

Determinants of firms’ investment behaviour: a multilevel approach

This article investigates the determinants of firms’ investment behaviour using firm data from 101 developing and emerging economies. A substantial number of firms does not invest in fixed capital or invests little relative to sales revenue. Using a multilevel probit model we study what factors trigger investment, and using a multilevel Heckman selection model we study what factors influence a firm’s investment-to-sales ratio. We find that firms’ investment behaviour has relatively little dependency on a country’s macroeconomic setting. Additionally, we find that, on average, firms that are completely foreign-owned have a relatively lower investment-to-sales ratio. Finally, we find evidence which suggests that the probability of investing is higher for firms located in countries with more control of corruption and we find some evidence which suggests that partially foreign-owned firms located in countries with relatively less corruption have a relatively higher investment-to-sales ratio.