Taxes and dividends: The UK evidence

This paper provides empirical evidence on the simultaneous effects of both corporation and personal income taxes on dividend payment adjustments and on the behaviour of share prices on the ex-dividend dates. The results show that companies set their dividend policies to minimise their tax liability and to maximise the after-tax return of their shareholders. In particular, firms that are unable to deduct the advanced corporation tax from their tax liability are found to pay low dividends. In addition, consistent with the tax hypothesis, we find that the differential taxation of dividends and capital gains results in a decrease in ex-day share prices by significantly less than the amount of the dividend. There is no evidence of a tax-induced dividend clientele.     

Taxation and skills investment in frictional labor markets

This paper examines the effects of wage taxation and corporate income taxation on training investment in frictional labor markets. Because of labor market frictions, the wage structure is compressed and workers do not capture the entire return from their skills. As a result, both firms and workers have incentives to support part of the costs of training investments. The analysis shows that when decisions to invest in training are made by firms and workers acting cooperatively, a wage tax increases the level of investment in skills whereas a corporate income tax decreases it. In this case, the introduction of a small wage tax unambiguously increases efficiency. The effects of both types of taxes on training are reversed when investment decisions are taken by firms alone. In any case, a corporate income tax is not neutral with respect to decisions to invest in skills even if the full cost of investment is deducted from taxable income in the period when it is incurred and the tax system provides full loss offset.     

Assessing the international spillover effects of capital income taxation

Changes in capital taxes by one economy spill onto other economies with internationally mobile capital. We evaluate these impacts using a two-region, intertemporal general equilibrium model. The foreign economy's unilateral reduction in corporate income taxation has positive but small effects on U.S. welfare. In contrast, unilateral reductions in personal income taxation impose large negative spillovers. The differences result from CIT being source-based and PIT residence-based. The CIT cut reduces tax burdens to U.S. residents who invest abroad, while the PIT cut reduces foreigners' tax burdens only. Through general equilibrium adjustments neglected in simpler models, the PIT cut lowers U.S. residents' welfare.     

Taxes and stabilization in contemporary macroeconomic models

The role of proportional and procyclic labor income taxes for automatic stabilization with stochastic productivity is analyzed in a contemporary macroeconomic model based on imperfect competition. The importance of short-run nominal wage rigidity for the effectiveness of progressive taxes on labor income for stabilizing output and raising household welfare is examined in a model that yields complete analytical solutions with stochastic output shocks. Increasing the procyclicity of labor income tax rates raises welfare with and without rigid nominal wages in the model economy. With fully flexible prices and wages, a positive covariance between the distortionary tax rate and productivity reduces the volatility of production and employment. This effect disappears under nominal wage rigidity, although progressive taxation can still raise welfare by reducing the distortion caused by a proportional labor tax. With rigid nominal wages and flexible consumer goods prices, payroll taxes levied at rates that rise with output can serve as automatic stabilizers. JEL Code E62 · H20     

Personal Taxation in Firm Market Valuation: Theory and Test*

In this paper, I extend Ohlson's 1995 firm market valuation model to incorporate personal taxes: the taxes on dividends and the taxes on capital gains. Without personal taxes, firm market value can be expressed as the present value of future benefits received by the shareholders (dividends, in this case). With personal taxes, the benefits received by the shareholders should be classified into three categories (due to their different tax treatments): dividends, share repurchases, and new share issues (i.e., contributed capital). The extended model shows the effects of personal taxation on firm market valuation: retained earnings are valued less than contributed stocks, both dividends taxes and capital gains taxes affect retained earnings valuation and firm market value, and firms choose cash distribution methods (paying dividends and repurchasing shares) to increase their retained earnings valuation, therefore increasing their market value. An empirical test using a sample from the Disclosure Select Canada and Financial Post Card data bases for the years 1995‐98 supports these personal tax effects.     

Ad Valorem Taxation on Intermediate Goods in Oligopoly

Thepaper compares the efficiency of value added taxation (VAT),in which intermediate goods are not taxed, with that of cascadetaxation, in which they are, when levied on imperfectly-competitivevertically-related industries. One type of commodity taxationis not always superior to the other in terms of welfare. Indeed,when intermediate-goods have close substitutes, VAT is the optimalcommodity tax system. But when input substitutability is weakor absent and input producers have market power, they shouldbe taxed. In fact, in the absence of lump sum taxes and withno input substitutability, it is optimal to tax, not to subsidize,the most monopolistic industry. True cascading, in which bothupstream and downstream industries are taxed, is thus betterthan VAT when, besides no input substitutability and both intermediateand final good producers with market power, the needed revenuerequirement is not small. We therefore submit a rationale forthe coexistence of VAT and cascade taxation.     

Reforming the Direct–Indirect Tax Mix

This paper provides a new framework for evaluating the welfare effects of commodity tax reforms. It is shown that tax reforms are welfare improving if and only if they satisfy the following intuitive property: on average, consumer prices fall for commodities with high marginal excess burdens. The rule is then applied to analyze a shift from differentiated commodity taxation to direct flat-rate taxation of labour income. The welfare impact of such reforms can be decomposed into two effects: (i) the increase in welfare associated with substitution among taxed commodities, and (ii) the loss in welfare associated with substitution between commodities and leisure. On balance, a shift towards direct taxation is desirable when inter-commodity substitution effects are large relative to commodity–leisure substitution effects. The analysis allows us to reconcile the apparently conflicting results of the tax reform and optimal taxation literatures.     

Multi-part tariffs and differentiated commodity taxation

We study commodity taxation in markets where firms, such as Internet Service Providers, energy suppliers, and payment card platforms, adopt multi-part tariffs. We show that ad valorem taxes can correct underprovision and hence increase welfare, provided the government applies differentiated tax rates to the usage and access parts of the tariff. We obtain this result in different settings, including vertically interlinked markets, markets where firms adopt menus of tariffs to screen consumers, and where they compete with multi-part tariffs. Our results suggest that exempting these markets from taxation may be inefficient.     

On Property Tax Coordination

This paper examines the welfare effects of inter-jurisdictional coordination of property taxes. Coordination in terms of compression, harmonization and radial changes of tax structure is considered. It is found that property tax coordination via uniform radial adjustments of taxes is in general welfare-superior to the other two types of tax changes. However, when there is a large disparity of initial tax rates between jurisdictions, harmonization of property taxes may lead to a larger welfare improvement.     

Why Capital Income Taxes Survive in Open Economies: The Role of Multinational Firms

This paper discusses the role of multinational firms and double taxation treaties for corporate income taxation in open economies. We show that it is optimal for a small open economy to levy positive corporate income taxes if multinational firms are taxed according to the full taxation after deduction system or the foreign tax credit system. Positive corporate taxes also occur in the asymmetric case where some countries apply the exemption system and others apply the tax credit system. If all countries apply the exemption system, the optimal corporate income tax is zero. We also show that, under tax competition, corporate income taxes are not necessarily too low from the perspective of the economy as a whole. While the undertaxation result is confirmed for the case of the exemption system, tax rates may also be inefficiently high if the deduction or the credit systems are applied.     

Dividend taxes,employment, and firm productivity

The paper examines the effect of dividend taxation on employment and productivity. I exploit a dividend tax cut of 10 percentage points for closely held private corporations in Sweden. Using data on all closely held Swedish firms with exact information on employees and their wages, I find that firms with limited internal funds increase productivity and wages relative to firms with sufficient internal funds whose investment decisions are less affected by dividend taxes. My findings indicate that dividend taxes constrain firms in investing efficiently. Lower taxes can result in higher capital and labor input and, thus, in higher productivity.     

Tax Competition and Foreign Capital

This paper derives welfare equivalence of double taxation rules in a tax competition model with discriminatory home taxes and the ability to finance subsidiary operations with host country capital. For a more general model, we provide sufficient conditions on the number of host sectors and factors that support double-tax-rule equivalence. Examples violating these conditions help identify economic factors under which a home country has strict preferences over double taxation rules. If the home tax rate can influence host factor prices, the home country weakly prefers deductions over credits as in the pure-home-equity financing case.     

Corporate Social Responsibility,Tax Aggressiveness,and Firm Market Value

This paper examines the relationship of corporate social responsibility (CSR), tax aggressiveness, and firm market value. An economic model has been developed to show that profit‐maximization firms are willing to incur additional costs in CSR, such as paying more taxes, as long as they can differentiate their products from non‐CSR firms, and that socially conscious consumers will buy products from CSR firms at prices higher than those of non‐CSR firms. The empirical study in this paper indicates that the higher the CSR ranking of a firm, the less likely a firm is to engage in tax aggressiveness. It also indicates that a reputation of higher CSR will enhance firm market value. Using Canadian companies listed in the S&P/TSX 60 index, I find that both firms’ five‐year effective tax rates and annual effective tax rates are positively associated with their overall CSR scores as well as with their social scores. Firms’ five‐year effective tax rates are also positively associated with their governance index. I also find that firms’ overall CSR ranking and governance scores are positively associated with their market value.     

An Efficiency Analysis of Consumption and Production Taxation with an Application to Value-Added Taxation

The usual arguments pro destination-based, consumption-oriented or pro origin-based, production-oriented VAT are found wanting. They largely ignore tax effects on locational choices of firms. This paper provides a comparison of consumption and production taxation within a model of firm and household mobility. It is shown that the case for consumption taxation becomes stronger when profit taxes are not available. The consumption tax is the more targeted instrument when households are to be induced to locate efficiently. It is argued that, with border controls lacking, the alternative option should be seen more in a wage tax and less in a production tax.     

Intangible investment and Ramsey capital taxation

The standard analysis of optimal fiscal policy aggregates different types of assets into a unique capital good and all types of capital taxes into a unique capital tax. This paper considers a disaggregated framework: an economy with corporate and dividend taxes, where firms invest in both tangible and intangible assets (which can be expensed or sweat). In our setup, firms can always respond to changes in the timing of taxation. We find that the optimal long-run policy features zero corporate taxes and positive dividend taxes, with labor and dividend taxes being identical. Moreover, the initial capital levy is relatively small.     

税费替代:增值税减税、非税收入征管与企业投资

通过减税促进企业投资和提振宏观经济是近年来中国税收制度改革的重要目标,但减税政策的实际效果却存在争议。本文利用2009年增值税转型改革,研究了减税对地方政府税费收入和企业非税负担的影响,从税费替代的角度揭示非税负担变动如何影响企业固定资产投资。研究发现:(1)增值税转型在减税的同时提高了地方政府非税收入并加重了企业非税负担,地方财政收入受增值税转型冲击越大,企业非税负担上升越明显。(2)上述应主要体现在小型、微型和民营企业上,大中型、非民营企业的非税负担未发生明显变化。(3)非税负担上升会显著抑制小型、微型和民营企业的固定资产投资,促使小型微型和民营企业通过持有更多现金和减少流动性负债来应对税费负担不确定性。本文有助于理解减税政策对小型微型和民营企业非税负担的溢出效应及其影响,为通过减税降费促进投资和提振经济提供经验支撑。     

Tax evasion in a Cournot oligopoly with endogenous entry

If an additional competitor reduces output per firm in a homogenous Cournot oligopoly, market entry will be excessive. Taxes can correct the so-called business stealing externality. We investigate how evading a tax on operating profits affects the excessive entry prediction. Tax evasion raises the number of firms in market equilibrium and can alter their welfare-maximising number. In consequence, evasion can aggravate or mitigate excessive entry. Which of these outcomes prevails is determined by the direct welfare consequences of tax evasion and the relationship between evasion and the tax base. We also determine conditions which imply that overall welfare declines with tax evasion.     

The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition

The ad valorem versus unit tax debate has traditionally emphasized tax yield. On this criterion, ad valorem taxes outperform unit taxes in terms of welfare for a wide range of imperfect competition settings including Dixit–Stiglitz monopolistic competition. However, in a number of policy fields such as environmental, health, and trade economics, policy makers use taxes to reduce the production/consumption volume in an industry, i.e., to correct an externality rather than to improve tax yield. This paper compares the two tax instruments with respect to equal corrective effect in a Dixit–Stiglitz setting with love of variety, entry, exit, and redistribution of tax revenues. We find that unit taxes lead to more firms in the industry, less output per firm, less tax revenue, but higher welfare compared to ad valorem taxes.      

Optimal capital structure under corporate and personal taxation

In this paper, a model of corporate leverage choice is formulated in which corporate and differential personal taxes exist and supply side adjustments by firms enter into the determination of equilibrium relative prices of debt and equity. The presence of corporate tax shield substitutes for debt such as accounting depreciation, depletion allowances, and investment tax credits is shown to imply a market equilibrium in which each firm has a unique interior optimum leverage decision (with or without leverage-related costs). The optimal leverage model yields a number of interesting predictions regarding cross-sectional and time-series properties of firms' capital structures. Extant evidence bearing on these predictions is examined.     

Dividend taxation and the ownership structure of private firms

This paper examines the effect of dividend taxation on the ownership structure of private firms. I exploit a German dividend tax increase that only affects corporate shareholders owning a minority stake. Using data on private German firms and their shareholders, I find that corporate shareholders reduce their minority stakes in firms after the dividend tax reform. This result is in line with the notion that, because minority shareholders do not have sufficient decision-making power to influence the payout policy, they can only react to a dividend tax increase by selling their shares. This effect is larger when the affected minority shareholders face high dividend tax costs. However, I find a smaller effect when the benefits of the minority stakes are highly relevant for the firm and the affected shareholders, suggesting that non-tax factors mute the response to dividend taxes. In addition, I find that the largest shareholder of the firm buys the minority stake, resulting in greater ownership concentration. These findings extend the prior literature that finds no effect of dividend taxes on the ownership structure of private firms.