Tax without Design: Recent Developments in UK Tax Policy

This paper considers the development of tax policy in the UK over the last decade or so and assesses policy change against a low bar – consistency and coherence. While this government has followed some consistent policies – notably, in some aspects of corporation tax and in increasing the income tax personal allowance – there are few signs of a wider coherent strategy. The same has been true of other recent governments. Many aspects of the system have become more complex. There have been numerous policy reversals. And few of those aspects of the system in most need of reform have been tackled. The need for reform, and a clear strategy for reform, remain as pressing as ever.     

Measuring the Effective Tax Burden in the Real World*

This paper argues that forward‐looking indices of the effective tax burden on income from capital – namely, effective marginal and average tax rates – are negatively biased because traditional models overlook dividend constraints associated with financial tax incentives, such as accelerated depreciation. The paper presents measures of the two indices adjusted to remove the bias and compares the new indices with the traditional ones. Numerical simulations carried out to quantify the magnitude of the bias for France, Germany, Ireland, Italy and the UK give evidence of sizeable distortions in the unadjusted indices and, in turn, suggest significant mismeasurement in the current assessment of the effective tax burden.     

Response of Tax Credit Claims to Tax Enforcement: Evidence from a Quasi‐Experiment in Chile

Diesel in Chile receives different tax treatments depending on its use. If diesel is used in industrial activities, the diesel taxes paid can be fully used as a credit against VAT, but if it is used in freight or public transportation – basically trucks and buses – only a fraction of diesel taxes paid can be claimed as a tax credit for VAT payments. As a result of this different tax treatment, firms have incentives to use ‘tax‐exempted’ diesel in activities requiring ‘non‐tax‐exempted’ diesel. This tax wedge therefore generates an opportunity for tax evasion, especially for firms with multiple economic activities, one of them being transport. In this paper, we analyse the impact of a tax enforcement programme implemented by the Chilean Internal Revenue Service (IRS), where letters requiring information about diesel purchases and use and vehicle ownership were sent to around 200 firms in 2003. Using different empirical strategies to consider the non‐randomness of the selection of firms, the empirical results show consistently that firms receiving a letter decreased their diesel tax credits by around 10 per cent.     

Pillar 2: tax competition in low-income countries and substance-based income exclusion

Pillar 2 of the OECD's global tax reform proposal will have significant direct and indirect impacts for low-income developing countries (LICs). Most interesting and problematic is the question as to how the global anti-base erosion (GloBE) rules for a proposed global minimum effective tax will affect tax competition behaviour in LICs, and how LICs should respond when a critical mass of higher-income economies adopt the new structure. Most LICs are source-only countries, and they are very much in competition to attract foreign direct investment. Do LICs want to continue to compete using the tax system to the extent possible, to step back from that competition, or to take some intermediate course? Pillar 2 does not itself change a country's desired position on the competition spectrum – it merely affects how, and to what extent, that position can still be obtained. This paper posits that LICs should adopt qualified domestic minimum top-up taxes, and that this will not itself have a negative impact on their competitiveness. The primary focus of the paper, however, is on the design of the substance-based income exclusion (carve-out), examining the following three questions. Should the GloBE have been designed without a carve-out? Would there have been a better way of designing it? How will LICs be affected? The paper concludes that, as little real advantage is likely to accrue to LICs from intangible assets, minimising tax competition for those assets will have relatively little impact on them; and that, from an economic efficiency standpoint, shifting the tax burden away from a normal return and toward economic rents – albeit imperfectly – is a reasonable solution.     

What is the After‐Tax Price of R&D? An Interstate Comparison*

As of 2005, 31 US states offered corporate income tax credits on research and development (R&D) expenses in order to encourage more in‐state innovation activities. Empirical questions about the efficacy of such tax breaks at the state level persist, in part because the complexity of the tax laws means that simple credit‐rate comparisons across states do not fully capture the differential variation in effective after‐tax price incentives firms face in choosing where to locate R&D activities. We are unaware of any research analysing and comparing the effective prices of R&D faced by firms, across all US states and utilising micro‐level data. Using data extracted from detailed reading of individual firms' 10‐K and S‐1 filings and of state‐level tax credit rules, we estimate the effective after‐tax price of basic and qualified research expenditure each firm would have faced in each of the 50 states had they been located there. Our methodology simulates the effective tax price of each firm's marginal dollar of research expenditure, assuming the firm chose to move all of its R&D operations to each of the 49 other states. Through Monte Carlo techniques, we consider the sensitivity of our interstate comparative results to several modelling assumptions. We find significant variation in after‐tax R&D prices across states with quite different R&D tax laws. Prices range from $0.176 to $0.520 on a marginal dollar of R&D in Virginia and Washington State, respectively. We also find that the interstate variability is generally more important – indeed, much wider than we had anticipated before investigating state‐by‐state regulations – than the inter‐firm variability within states.     

The impact of international spillovers on Swiss inflation and the exchange rate

Understanding the effects and transmission of international spillovers is key to ensuring that the best possible decisions are reached by central banks – particularly those of small open economies. This paper analyses the impact of international spillovers on Swiss inflation and the exchange rate, and examines the response of the Swiss National Bank (SNB) to these phenomena. In doing so, the paper compares the recent crisis period starting in mid-2008 with earlier decades. While the exchange rate absorbed a sizeable share of global inflationary pressure before the crisis, spillover effects transmitted through the exchange rate have been the principal cause of the significant decline in Swiss inflation since 2008. The SNB has therefore repeatedly adjusted its monetary policy – and resorted to some unconventional measures – in order to contain these spillover effects. These actions have so far kept the adverse effects of international spillovers on Swiss inflation at bay. However, as Switzerland's experience since the onset of the financial crisis shows, controlling inflation may occasionally become more difficult for small open economies.     

关于进一步完善结构性减税政策的研究

由美国次贷危机引发的国际金融危机,不仅冲击了许多发达国家,而且波及广大发展中国家,我国同样遭受影响。为应对这场金融危机,我国实施了积极的财政政策和适度宽松的货币政策,取得了良好的效果。本文着重分析我国应对金融危机的结构性减税政策,说明了实施结构性减税政策的原因,介绍了结构性减税政策的内容,总结了结构性减税政策实施的成效与存在的问题,提出了进一步完善结构性减税政策的建议。     

Company Tax Reform in the European Union

The European Commission recently proposed to move towards a consolidated tax base for European multinational companies, to be allocated across EU member states through a system of formula apportionment. This paper argues that while the Commission's blueprints for company tax reform may reduce existing problems of transfer pricing, they will also create new distortions as long as existing tax rate differentials are maintained. The paper also investigates the changes in international tax spillovers which will occur as a result of a switch from the current system of separate accounting to formula apportionment. The final part of the paper discusses whether more conventional corporate tax harmonization should still be a long term policy goal for the EU and presents quantitative estimates of the efficiency gains from harmonization.     

The stock market effects of a securities transaction tax: Quasi-experimental evidence from Italy

In the aftermath of the financial crisis, in several countries new levies on the financial sector have been proposed and in some cases implemented. We focus in particular on the recent introduction of a securities transaction tax (STT) in Italy. A peculiarity of the Italian STT is that it only concerns stocks of corporations with a market capitalization above € 500 million. We exploit this feature via a differences-in-differences approach – comparing taxed and non-taxed stocks before and after the introduction of the tax – and via a regression discontinuity design – comparing the performance of stocks just above the threshold with those just below. Focusing on the regulated market, we find that the new tax reduced liquidity, but it left transaction volumes and returns substantially unaffected. There is also evidence – although not conclusive – that the tax increased volatility.     

Mobile people, mobile capital and tax neutrality: Sustaining a market for Offshore Finance Centres

This paper examines the self-reported effects on business performance, sustainability and confidence following international initiatives to regulate Offshore Finance Centres (OFCs). Since the late 1990s small countries and territories have been encouraged and pressured by multilateral organisations and supranational institutions to exchange information on civil and criminal tax matters. Interview based research in Australia, Andorra, Guernsey, Samoa and Singapore has been carried out to determine how OFC clients have reacted to these initiatives along with their impacts on the offshore sector, including local economies and societies. This paper shows that these international programs have caused contraction and reorganisation in leading OFCs. However, their diverse clientele and access to established markets for global financial services continues to make them attractive locales for fund management, trusts, captive insurance and private banking. The effects on OFCs located in smaller, developing countries have been much more severe, with reports that these jurisdictions are facing major problems sustaining a share of the worldwide market for financial services and products. This suggests that because of the uneven consequences of international efforts to regulate offshore finance in selected jurisdictions, these initiatives may actually increase tax competition rather than reduce it, at least in the short term. For multilateral policies to be effective, it may well be necessary for wealthy and poor nations, including OFCs (which include some of the world's poorest and wealthiest jurisdictions) to determine if tax competition contributes to or ameliorates the inconsistencies and contradictions of globalisation and the uneven development that it produces on a worldwide scale.     

The distribution of information in speculative markets: a natural experiment

We use a unique natural experiment to shed light on the distribution of information in speculative markets. In June 2011, Betfair – a UK betting exchange – levied a tax of up to 60% on all future profits accrued by the top 0.1% of profitable traders. Such a move appears to have driven at least some of these traders off the exchange, taking their information with them. We investigate the effect of the new tax on the forecasting capacity of the exchange (our measure of the market's incorporation of information into the price). We find that there was scant decline in the forecasting capacity of the exchange – relative to a control market – suggesting that the bulk of information had hitherto been held by the majority of traders, rather than the select few affected by the rule change. This result is robust to the choice of forecasting measure, the choice of forecasting interval, and the choice of race type. This provides evidence that more than a few traders are typically involved in the price discovery process in speculative markets.     

中国银行业税负比较、绩效影响与对策选择

本文通过历史比较与国际比较，指出中国银行业虽然综合税负不断下降，但仍较国外偏重，进而运用面板数据模型论证了相对过重的税收负担对中国银行业经营绩效产生负效应，最后，提出降低我国银行业税负的若干政策建议，以应对经济全球化和国际金融危机的双重挑战，提高中国银行业在开放金融体系中的竞争力。     

Decline of Controlled Foreign Company Rules and Rise of Intellectual Property Boxes: How the European Court of Justice Affects Tax Competition and Economic Distortions in Europe

The European Court of Justice (ECJ) has become an influential player in the field of direct taxation in the European Union (EU) in the past 20 years. However, it is unclear whether or not the ECJ's decisions and the corresponding reactions by the member states actually contribute to tax neutrality in economic terms and, therefore, to the achievement of the internal market. In 2006, the ECJ limited the applicability of specific tax rules in the EU that are intended to prohibit the excessive use of low‐tax countries by multinationals. Our counterfactual analysis shows that the court's restriction of so‐called controlled foreign company rules and the related second‐round reactions by some member states – i.e. the introduction of low‐tax regimes for income from acquired intellectual properties (IP boxes for acquired IP) – cast doubt on the seemingly positive effects the ECJ has on reducing tax distortions. In addition, we demonstrate that the restricted applicability of IP boxes as endorsed by the OECD and the European Commission would strengthen tax neutrality in Europe.     

Optimal Environmental Taxation with Capital Mobility*

Climate policy exemptions for energy‐intensive sectors are often justified with distributional concerns. One concern is that households employed in energy‐intensive sectors might be affected disproportionally because of (international) capital mobility. By assuming that workers cannot move freely between sectors, we can reproduce this concern: uniform climate policy causes more inequality between the sectors when capital is mobile than when it is not. However, we find that affected households can be relieved more effectively with sector‐specific labour taxes than with sector‐specific climate policy. The reason for this finding is that households benefit more directly from sector‐specific labour tax cuts than from climate policy exemptions. Keeping climate policy uniform across sectors has the added benefit of creating incentives for long‐term decarbonisation. In addition, we find that the differential effect of capital mobility depends on the government's degree of inequality aversion – redistribution is more expensive when capital is mobile.     

Taxpayers' Behavioural Responses and Measures of Tax Compliance ‘Gaps’: A Critique and a New Measure

The work of Feldstein (1995 and 1999) has stimulated substantial conceptual and empirical advances in economists' approaches to analysing taxpayers' behavioural responses to changes in tax rates. Meanwhile, a largely independent literature proposing and applying alternative measures of tax compliance has also developed in recent years, which has sought to provide tax agencies with tools to identify the extent of tax non‐compliance as a first step to designing policies to improve compliance. In this context, measures of ‘tax gaps’ – the difference between actual tax collected and the potential tax collection under full compliance with the tax code – have become the primary measures of tax non‐compliance via (legal) avoidance and/or (illegal) evasion. In this paper, we argue that the tax gap as conventionally defined is conceptually flawed because it fails to incorporate behavioural responses by taxpayers. We show that conventional tax gap measures, which ignore the presence of behavioural responses, exaggerate the degree of non‐compliance. This potentially applies both to indirect taxes (such as the ‘VAT gap’) and direct (income) taxes. Further, where these conventional tax gap measures motivate reforms designed to increase the tax compliance rate, they will likely have a tax‐base‐reducing effect and hence generate a smaller increase in realised tax revenues than would be anticipated from the tax gap estimate.     

Faculty perspectives on international taxation topics

This paper presents perspectives of accounting faculty members on the relative importance of topics that should be presented in a one-semester graduate level international taxation course. Understanding of international taxation has become an increasingly critical part of the tax and accounting practices of the big four and other major public accounting firms as well as to U.S. multinational business firms. Therefore, college and universities may find it useful to provide at least some coverage of international taxation topics in a separate course or as part of other courses in their tax and accounting programs. If a separate course is offered, an important consideration of which topics should be covered in the course, since there are more topics than can be reasonably covered in one course. This paper analyzes the responses of members of the American Accounting Association's International Accounting Section to a survey of which topics should be included in a one-semester international tax course. Results are compared with those of prior studies to determine whether and the extent to which perspectives have changed over time and based on the type of survey respondent. Findings of this paper will offer guidance regarding topic selection to the accounting faculty members who are charged with developing an international taxation course. The findings may also be of interest to anyone concerned with international business in general and taxation in particular.     

Corporate Tax Harmonization in Europe: It's All About Compliance

Although the hope may be to reduce economic distortions in captial markets, the primary focus of corporate tax consolidation among member states of a federation is to reduce compliance and administrative burdens. For example, the Canadian provinces have sufficient flexibility to determine their corporate tax policies, and effective tax rates on captial vary considerably by province, but they still have achieved a considerable degree of harmonization of tax bases. The European Union should also try to implement a consolidated tax base for companies. A compulsory base would be best, but it is likely that the optional consolidated tax base is most practical at this time.     

Optimal factor and commodity taxation in a small open economy

A two-sector trade model with specific factors and perfect international capital mobility is used to analyze the optimal mix of factor and commodity taxation in a small open economy that faces domestic or international constraints on its tax instruments. In the unconstrained benchmark case, the small country will tax specific factors and domestic consumption but chooses zero tax rates for a selective production tax (i.e., an origin-based commodity tax) and a source-based tax on capital income. When commodity taxation must follow a combination of origin and destination principles, then this mixed commodity tax rate will be positive and its production effects are partly compensated in the optimum by a capital subsidy. These international restrictions interact with domestic constraints when rents accruing to fixed factors cannot be taxed by a separate instrument, and a positive tax rate on capital serves as an indirect way of rent taxation.     

Means Testing and Retirement Choices in Europe: A Comparison of the British and Danish Systems*

We develop a simulation model of household behaviour in which both the consumption/saving and labour/leisure choices are endogenous. This model is used to explore the effects of the UK and Danish state tax and benefit systems on the labour supply of workers aged 50 or over. We find that, in broad terms, differences in labour force participation can be accounted for by differences in benefit structures. Furthermore, our simulations suggest that the UK system is preferred by young people while the Danish arrangement – which imposes a larger tax burden and provides larger welfare benefits – is chosen by people of 50 or older. Notably, people older than 60 are in the majority in the simulated population. The Danish system does not promote notably greater equality over the lifetime, but it does underpin a higher level of consumption for people of 50 or older.     

The Effect of Volume of Intrafirm Transfers on Market Metrics

In this paper, we examine the relationship between international intrafirm area transfers and market metrics as measured by market-to-book value and systematic risk. Intrafirm transfers – the amount that multinational corporations charge one another for the transfer of goods, intellectual property, and services – have become an increasingly important issue for policymaking, managerial, financial, and tax purposes. This paper also examines whether international intrafirm intergeographic area transfers are attributed to corporate tax. We find that firms with a sizable volume of international intrafirm transfers have higher systematic risk than comparable firms without these transfers. We show cross-sectionally that firms engage in international transfers have a higher market-to-book ratio, suggesting that transfers add value through their effect on earnings and taxes. Consistent with Mills and Newberry (2003) and Collins, Kemsley, and Lang (1998), we document that U.S. (global) income tax is positively (negatively) related to intrafirm transfers, implying that U.S. multinational firms shifted taxable income to the United States from 1995 to 1999.