Tax Incentives,On-the-job Training,and Human Capital Accumulation: Evidence from China

This study investigates the effects of an increase in the proportion of tax credit (IPTC) policy on firms' on-the-job-training expenses. We document that the IPTC significantly increases on-the-job training expenses; the result remains valid after a series of robustness tests. An analysis of heterogeneous effects shows that privately owned firms and small-scale firms are more susceptible to the IPTC's impacts than state-owned and large-scale firms. Finally, we find that the IPTC can improve the production efficiency of firms and promote firm performance and innovation.     

PCAOB international inspection access and debt contracting: Evidence from American Depositary Receipt firms

We examine whether the Public Company Accounting Oversight Board’s (PCAOB’s) international inspection access affects the usage of accounting-based debt covenants in bank loan contracts of American Depositary Receipt (ADR) borrowers. We show that there is an increase in the use of financial covenants in debt contracts after the auditor of an ADR borrower becomes subject to PCAOB inspections. We also document that lenders increase the usage of financial covenants only in loans to ADR borrowers domiciled in countries with weak home country intuitions, and the increase is more pronounced for ADR borrowers from countries without a local auditor regulatory oversight body. These findings suggest that PCAOB regulatory oversight enhances the perceived credibility of accounting numbers for debt contracting and serves as a substitute for the weak monitoring of auditors for ADR borrowers domiciled in countries with weak country institutions.     

Tax competition for FDI: China’s exceptional approach

International Tax and Public Finance - In this Policy Watch study, we explore the different approaches to corporate income tax (CIT) setting in three economically significant regions: USA, EU, and...     

Intergenerational consequences of gradual pension reforms

Balancing the government budget in an aging economy may require adjusting gradually pension benefits. Such policy change can take two forms: adjusting the accrual rate (the rate at which individuals built-up pension entitlements while working) or the indexation rate (the rate a which accrued entitlements are linked to nominal wage growth). We compare the consequences of such gradual policies across cohorts. We identify a fundamental generational trade-off between democracy and equality. In particular, we show that for Belgium, 80% of the population alive at the time of the reform prefers the accrual to the indexation reform, with the implication that the youngest half of the population would bear 85% of the total adjustment cost. The indexation reform provides more generational equality because the phasing in over time has larger base and thus benefit cut can be smaller per capita. We then consider other reforms improving the generational equality, showing that all those reforms fail to gain majority support. Finally, considering labor incentives, we show that the indexation reform is also more efficient than the accrual reform. Efficiency meets generational equality.     

Institutional determinants of emerging market returns and flows

Investors commonly rely on macroeconomic variables to drive capital allocation decisions. But other institutional factors may alter investor returns as well, particularly in emerging market countries. Given these concerns, this paper examines the effects of institutional factors—specifically democracy, transparency and corruption—on emerging market equity returns and flows. We find that institutional quality impacts stock market returns and flows in emerging markets where corruption, transparency, and democracy levels are below average. We also find that government-owned or controlled industries are positively impacted by a deterioration in the corruption and democracy indexes, while highly concentrated sectors, like the financial industry, are negatively impacted by improving transparency.     

Pooling my personal account: Income responses to the payroll tax in China

Developing countries collect not only a far lower share of GDP in taxes, but also less payroll taxes than rich countries. This paper explores income responses to the payroll tax by evaluating the 2006 pension reform that subtracted 3 percentage points of employees' Defined Contribution account in China. First, our estimate of total income elasticity with respect to the pension rate is larger than 2, implying a lower optimal payroll tax rate than in rich countries. Second, we separate total income into labor and non-labor income, and show significant income shifting from labor to non-labor income. Third, we provide suggestive evidence that income responses to the pension reform are from evasion rather than real responses. We emphasize the necessity of administrative capacity for developing countries to extend the pension system. Remarkably, sharing the employer payroll tax with employees may be a self-enforcement mechanism, similar to the value-added tax, of the payroll tax.