Property Tax and Housing Returns

This paper evaluates the effects of property tax on housing. While land tax and capital gains tax are widely used for curbing hoarding of land and speculation, its effectiveness is inconclusive. The imposition of a capital gains tax will impair the liquidity of property transaction, lower the rate of return on property investment, and reduce revenue from land sales which represents an important tax resource for the communities. This paper shows that a capital gains tax is capitalized into housing prices. Individuals tend to postpone the purchase of houses because of transaction taxes. Using an impulse response function, we show that a transaction tax has a dynamic negative impact on housing returns. While this paper focuses on Hong kong, for the purpose of comparison Singapore and Taiwan are also discussed.     

The coupon-induced tax clientele effect in bond prices

A pricing model for default-free bonds under differentia! taxation of coupon income and capital gains is presented which explicitly considers coupon-induced tax clienteles. Subsequent analysis provides indirect evidence in support of the existence of the coupon-induced tax clientele effect, while direct evidence is provided by analyzing differences in marginal tax rates estimated across different coupon levels for sets of US Treasury bonds with the same maturity date. The results are also generally consistent with the traditional notion that marginal tax rates are inversely related to coupon levels.     

Tax Regimes and Capital Gains Realizations

This paper contrasts the individual capital gains realization behavior between progressive and proportional tax regimes. Using a longitudinal panel of over 288,000 individuals in Sweden, I exploit the 1991 tax reform in Sweden that changed progressive capital gains tax rates ranging from 12% to 80% to a proportional tax rate of 30%. Using the proportional tax system to control for non-tax reasons to realize capital gains, I show that individuals are highly responsive to capital gains tax incentives created by temporary income changes under a progressive capital gains tax. More specifically, I find that individuals with temporary negative (positive) income changes sell (hold) shares that they would hold (sell) in the absence of temporary tax incentives. Further, I show that high-income individuals are more tax sensitive than low-income individuals. This result indicates that low-income individuals facing temporary negative income changes could trade predominantly for non-tax reasons.     

The interaction of corporate dividend policy and capital structure decisions under differential tax regimes

We develop a valuation model that integrates corporate capital structure and dividend payout policies. The resulting “extended” Miller (J Financ 32:261–297, 1977) model explicitly incorporates the different tax rates on corporate income, personal interest, dividends, and capital gains. We apply the model to ten different U.S. tax regimes since 1979 and generate several testable predictions. When the dividend tax rate exceeds the capital gains tax rate, dividend payout can partially offset value-enhancing effects of leverage. When the two rates are close, dividend payout loses its moderating influence. Using the S&P 1500 universe, we obtain empirical results that are consistent with the model’s predictions.     

Determinants of the medium of payment used to acquire privately-held targets

Since private firms have a unique ownership structure, the method of payment decision when acquiring private firms is influenced by a different set of factors than the method of payment decision when acquiring public firms. We find that bidders are more likely to pay for private targets with stock when the capital gain tax rate is relatively high. This relationship is attributed to greater tax benefits to private owners who receive stock in periods when the capital gains tax is high. Bidders are more likely to use stock in takeovers when the targets are high-tech firms, which we attribute to protection against overpayment by using a contingent pricing method. Bidders are more likely to use cash in takeovers since the Sarbanes-Oxley Act, which we attribute to the higher level of due diligence by bidder managers and board members, and therefore a reduced need for contingent pricing methods like stock. Overall, the results suggest the likelihood of using stock to acquire private targets is positively related to the information asymmetry between the parties, while the likelihood of using cash is greater when conditions (such as SOX) reduce the information asymmetry.     

Innovation dynamics and fiscal policy: Implications for growth,asset prices,and welfare

We study the equilibrium implications of different fiscal policies on macroeconomic quantities and welfare by utilizing an endogenous growth model that matches asset pricing data well. The fiscal instruments of interest are (i) subsidies to R&D expenditure, consumption and capital investment, and (ii) cuts in labor and corporate tax rates. Our equilibrium analysis provides new insights on the interplay of innovation dynamics and fiscal policy. Importantly, we find growth and welfare to be inversely related when changing R&D subsidies. However, this depends on how well the model reproduces asset pricing dynamics. Moreover, only subsidies to capital investments and cuts in the corporate tax rate have the potential to increase both growth and welfare.     

Sooner or Later? – Paradoxical Investment Effects of Capital Gains Taxation under Simultaneous Investment and Abandonment Flexibility

This paper analyzes the impact of capital gains taxation on investment timing decisions for risky investment projects with entry and exit flexibility under differential tax rates for ordinary income and capital gains. We investigate whether capital gains taxation influences immediate and delayed investments asymmetrically, given the optimal abandonment decision. If capital gains taxation induces a lock-in effect, this effect is anticipated in the investment timing decision. In contrast to prior research, our numerical simulations show that this lock-in effect of capital gains taxation can induce normal as well as paradoxical effects on investment timing under simultaneous entry and exit flexibility. A paradoxical timing effect, i.e., investment accelerated by capital gains taxation, especially emerges for high liquidation proceeds or, more conservative tax accounting, low interest rates, and low volatilities. In these cases, capital gains taxation reduces the value of the option to invest and hereby increases the propensity to invest immediately. As a second paradoxical tax effect, capital gains taxation may favor delayed real investment over financial investment. Facing these results, tax legislators should not use capital gains taxation as a short-term tax policy instrument to influence investors' timing decisions.     

Changing dividend policies caused by the Tax Reform Act of 1986: An empirical analysis

In this paper the authors analyze the change in dividend yield (and capital gains yield) patterns of the group of 1108 firms listed on the monthly CRSP tapes from 1984 to 1988. It was anticipated that the Tax Reform Act of 1986 would lead to a pattern of increasing dividend yields and decreasing capital gains yields in 1987 and 1988 due to the elimination of the capital gains tax rate by 1988 and the overall reduction in personal tax rates. The results were consistent across all dividend groups as expected.     

Is corporate payout taxation a long run phenomenon? Evidence from international data

This paper examines whether dividend and capital gains taxation influences corporate payout policy using the country level data of 21 countries in panel versions of time series models. We find that dividend relative to capital gains tax penalty is cointegrated with corporate payouts (dividends and share repurchases) i.e. corporate payout taxation may be a long run phenomenon. Further, the cointegrating vector estimates are largely consistent with the traditional view of dividend taxation whereby the tax penalty discourages dividends, while the estimates give limited support to the premise that firms substitute dividends for share repurchases in response to an increase in dividend tax penalty. Long run causality also operates between the tax penalty and payouts in the error correction models. Additionally, dividend tax appears to be more influential than capital gains tax on dividend payout decisions. Lastly, taxation affects dividends more significantly in countries with high investor protection.     

On the “Lock-In” Effects of Capital Gains Taxation

The most important drawback of a tax on realized capital gains is its “lock-in” effect. This paper uses a simple land development model to examine the distortion that the lock-in effect generates. A surprising result is that the lock-in effect does not arise if the basis for the capital gains tax (usually the price at which the current owner acquired the land) is sufficiently high. Rather than delaying the sale, the owner sells the land as soon as possible even if the land will be developed much later. In this case, the capital gains tax creates no “real” distortion because it does not affect the development time. In particular, if the basis is the price formed under perfect foresight, the lock-in effect never arises.     

On revenue recycling and the welfare effects of second-best congestion pricing in a monocentric city

This paper examines congestion taxes in a monocentric city with pre-existing labor taxation. When road toll revenue is used to finance labor tax cuts, 35% of the optimal road tax in our numerical model does not reflect marginal external congestion costs, but rather functions as a Ramsey–Mirrlees tax, i.e. an efficiency enhancing mechanism allowing for an indirect spatial differentiation of the labor tax. This adds a quite different motivation to road pricing, since welfare gains can be produced even in absence of congestion. We find that the optimal road tax is non-monotonic across space, reflecting the different impacts of labor supply elasticity and marginal utility of income, which both vary over space. The relative efficiencies of some archetype second-best pricing schemes (cordon toll, flat kilometer tax) are high (84% and 70% respectively). When road toll revenue is recycled lump-sum, the optimal toll lies below its Pigouvian level. Extensions in a bimodal framework show that the optimality of using road toll revenue to subsidize public transport depends on the initial inefficiency in public transport pricing.     

Corporate income tax and futures hedging

Our research is motivated by the Corn Products vs. Arkansas Best Supreme Court decisions that pitched the controversy of the tax treatment of gains and losses from futures hedging. The use of futures contracts as risk management tools depends on the tax code. In this paper we address complications in the current tax code that allow for asymmetric offset: Ordinary losses can be applied against capital gains; however, capital losses cannot by applied against ordinary gains. Also we consider the issue of tax loss carryover. We investigate the optimal hedge ratios under these scenarios analytically where possible, and numerically where necessary. Michael Metz is an independent commodity market consultant.     

Experiencing Change in German Controlling – Management Accounting in a Globalized World

Abstract

In this study, I consider the effects of tax risk from tax volatility on the pricing of syndicated debt. Tax volatility is an interesting feature in that managers have some discretion over the risks they take with their tax strategies, which, however, are often harder to monitor for outsiders than risks related to other business activities. Framing my predictions based on the theoretical model developed by Merton [1974], I hypothesize and find that tax volatility is incrementally informative to other priced risks suggesting that tax risks per se are relevant to lenders. Moreover, I find that the results are stronger when the loan contract does not include performance pricing provisions or other restrictions, such as capital expenditure covenants, that protect lenders. This evidence adds to knowledge about the real effects of tax risk.     

风险投资人背景与IPO折价——来自我国创业板与中小板的证据

近年来,我国风险投资行业发展迅速,募资、投资规模及IPO表现异常活跃。风险投资行业的迅猛发展引起学术界的广泛关注,本文选取了2012年12月31日前在深圳证券交易所创业板上市的355家公司与中小板上市的701家公司的横截面数据,对风险投资人背景与上市公司IPO折价的关系进行了研究。结果表明,我国不同背景风险投资与IPO折价之间的关系并不明显,IPO价格未能恰当地反映不同背景风险投资人对上市公司股票价值的影响。     

Auto pollution and congestion in an urban model: An analysis of alternative strategies

Congestion and pollution externalities associated with automobile driving are examined for their effect on urban structure. A monocentric urban model which incorporates household preferences for both an unpolluted environment and for leisure time is presented, and used to evaluate alternative pricing and emissions policies on automobile use and their effects on city structure. Optimal tax gradients for driving are derived, and compared with second best cases of per mile taxes and no taxes. As externalities gradients become more nonlinear, the welfare gains from employing optimal taxes rather than a per mile tax are increased. The appropriate choices of an emission standard, highway capacity, and highway pricing policy must be made simultaneously and depend on household preferences.     

Proposals to Tax Life Insurance Savings as Personal Income

A bstract . Proposals to tax the realized net increment built up in life insurance policies amount to suggestions that we tax rewards to suppliers of capital. As tax policy it would tend to discourage capital accumulation. Many types of income and of capital gains are not taxed as a matter of social policy. Taxing the "inside buildup" would obstruct the building up of a capital base for the family and the economy. Economists recognize that there are alternatives, e.g. , a consumption based tax. In a time of great need for capital, a time of capital shortage, this tax policy would be retrogressive.     

The timing of residential land development: A general equilibrium approach

A formal model of the development process is constructed in order to arrive at a better understanding of the land development process, the change in land prices over time, and the effects of public policy on these variables. The relationship between the rate of interest and the rate of price appreciation on land is shown to depend upon development costs, agricultural opportunity costs, market structure, and the level of Ricardian rents on land. The effects of a land tax and a capital gains tax on the rate of development are also analyzed.     

Housing capital-gains taxation and homeowner mobility: Evidence from the Taxpayer Relief Act of 1997

We provide new evidence on the impact of housing capital-gains taxation on homeowner behavior by examining residential mobility before and after the Taxpayer Relief Act of 1997 (TRA97), which generated the most sweeping reform of capital-gains taxation in the last two decades. In addition to lowering marginal tax rates on long-term capital gains for all assets, TRA97 also eliminated any differential treatment of housing gains above and below age 55, allowing all homeowners to qualify for capital-gains exclusions. Utilizing data drawn from the Current Population Survey (CPS) on either side of the law change (1996 and 1998) on homeowners just above (56–58 year olds) and below (52–54 year olds) the age-55 threshold and a reduced-form, difference-in-difference empirical approach, our estimates suggest that the repeal of the differential capital-gains tax treatment by age embodied in TRA97 had an economically important and statistically significant impact on the residential mobility of under-55 homeowners. Across a variety of specifications, the repeal raised the mobility rate by around 1–1.4 percentage points, which, for a mean mobility rate of 4 percentage points, represented an increase in the mobility rate of homeowners in their early 50s by 22–31%. Furthermore, the bulk of this effect was concentrated among highly mobile homeowners who a priori were more likely to have wanted to trade down (e.g., divorced, empty nesters), those facing higher capital gains tax rates, and those living in states that had experienced higher rates of nominal appreciation.     

The effect of systematic risk factors on counterparty default and credit risk of interest rate swaps

This research investigates the effect of specific systematic risk factors on credit risk pricing and capital allocation of interest rate swaps. Because of the stochastic nature of uncertain future cash flows and interest rates, practitioners typically employ the Black-Scholes option pricing model in combination with a simulation analysis to establish capital requirements and estimate the shadow price of an interest rate swap. However, this practice of pricing swap risk excludes systematic risk factors that affect the risk shadow price, thereby underestimating the capital allocation required for financial institutions. This research demonstrates the effect of risk mispricing when simulation models ignore systematic risk factors such as model risk, convexity risk, and parameter risk on the pricing of interest rate swaps.     

Housing as an asset and the effects of property taxation on the residential development process

A model of residential development is constructed recognizing the asset side of land and housing. The equilibrium process is characterized under the perfect foresight assumption, and the effects of a capital gains tax (both unanticipated and anticipated) and a tax on property values are examined.