Which countries become tax havens?

This paper analyzes the factors influencing whether countries become tax havens. Roughly 15% of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Controlling for other relevant factors, governance quality has a statistically significant and quantitatively large association with the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 26% to 61% as governance quality improves from the level of Brazil to that of Portugal. Evidence from US firms suggests that low tax rates offer much more powerful inducements to foreign investment in well-governed countries than do low tax rates elsewhere. This may explain why poorly-governed countries do not generally attempt to become tax havens, and suggests that the range of sensible tax policy options is constrained by the quality of governance.     

What drives entrepreneurs underground? The role of tax morale

Using novel cross-country data, we examine whether and to what extent tax morale impacts informal entrepreneurship. Employing instrumental variables strategy, we find that countries with higher tax morale enjoy lower informal entrepreneurship.     

Do all countries follow the same growth process?

We estimate finite-mixture models in which countries are sorted into groups based on the similarity of the conditional distributions of their growth rates. We observe countries growth experiences over the 1970–2000 period and find evidence for a model in which there are two classes of countries, each with its own distinct growth regime. Group membership does not conform to the usual categories used to address parameter heterogeneity such as region or income. We find strong evidence that the quality of institutions and specifically, the degree of law and order, helps to sort countries into different regimes. Once we control for institutional features of the economy, we find no evidence that geographic features such as latitude and being landlocked play a role in determining the country groupings.     

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.     

Do vertical spillovers differ by investors’ productivity? Theory and evidence from Vietnam

Developing countries are eager to host foreign direct investment to receive positive technology spillovers to their local firms. However, what types of foreign firms are desirable for the host country to achieve spillovers best? We address this question using firm‐level panel data from Vietnam to investigate whether foreign Asian investors in downstream sectors with different productivity affect the productivity of local Vietnamese firms in upstream sectors differently. Using endogenous structural breaks, we divide Asian investors into low‐, middle‐, and high‐productivity groups. The results suggest that the presence of the middle group has the strongest positive spillover effect. The differential spillover effects can be explained by a simple model with vertical linkages and productivity‐enhancing investment by local suppliers. The theoretical mechanism is also empirically confirmed.     

Do income tax breaks for the elderly affect economic growth?

Income tax breaks for elderly taxpayers are sizable, widespread, and potentially affect growth through migration and other behaviors. We provide the first investigation into the growth effects of differential tax policy by age, taking a multi-pronged empirical approach to US state-level data since 1977. Some analyses include panel error-correction models combined with variation in state-level policies over time. Alternative analyses use how changes in federal tax law manifest at the state-level. Results suggest that taxes on lower income taxpayers, of any age, decrease growth the most, while taxing the high income elderly—those targeted recently—has little effect.     

Do all countries grow alike?

This paper investigates the driving forces of output change in 77 countries during the period 1970–2000. A flexible modeling strategy is adopted that accounts for (i) the inefficient use of resources, and (ii) different production technologies across countries. The proposed model can identify technical, efficiency, and input change for each of three endogenously determined regimes. Membership in these regimes is estimated, rather than determined ex ante. This framework enables explorations into the determinants of output growth and convergence issues in each regime.     

When and why do countries break their national fiscal rules?

This paper identifies determinants of compliance with various types of national numerical fiscal rules. Based on 51 fiscal rules in force in EU member states from 1995 to 2015, the analysis identifies determinants among specific rule characteristics and their fiscal frameworks, as well as their political, (socio-)economic and supranational environments. While the average compliance across all rules and countries is around 50%, compliance with rules constraining stock (rather than flow) variables, set out in coalitional agreements, as well as rules covering larger parts of general government finances is significantly higher. Furthermore, independent monitoring and enforcement bodies (issuing real-time alerts) turn out to be significantly associated with a higher probability of compliance. Several theories of the deficit bias of governments due to government fragmentation, decentralization and political budget cycles are also significant with regards to compliance with fiscal rules. However, neither the economic environment or business cycle, nor forecast errors (except for an unexpectedly higher primary balance) on average seem to play a significant role.     

Reexamining the relationship between inflation and growth: Do institutions matter in developing countries?

Using a large panel of countries during the period 1950–2009, we estimate the inflation thresholds above which its association with economic growth is expected to be negative, taking into account differences in institutions across countries. First, in line with previous literature, we find that the estimated threshold is substantially higher for developing countries compared to that of developed countries. However, we further show that the inflation threshold in developing economies falls when we consider reduced groups that exceed certain levels of institutional quality. We also find that the cost of inflation increases with the quality of institutions.     

Do low corporate income tax rates attract FDI? – Evidence from Central- and East European countries

Fifty six bilateral country relationships combining 7 home countries from the EU and the US, and 8 Central and East European host countries (CEECs) of foreign direct investment (FDI) from 1995-2003 are used in a panel gravity-model setting to estimate the role of taxation as a determinant of FDI. While gravity variables explain most of the variation of FDI inflows, the bilateral effective average tax rate (beatr) is roughly equally important to other cost-related factors. The semi-elasticity of FDI with respect to taxes is about -4.3. This value is above those of earlier studies in absolute terms and can partly be attributed to using the beatr instead of the statutory tax rate. Our results indicate that tax-lowering strategies of CEEC governments seem to have an important impact on foreign firms location decisions.     

Do more ethnically and religiously diverse countries have lower democratization?

The effects of diversity on democratization are investigated here. Ethnic fractionalization and polarization do not seem to affect democratization significantly, whereas religious fractionalization and polarization do affect democratization; countries with higher religious diversity experienced more democratization in the 1990s.     

Do population age groups matter in the energy use of the oil-exporting countries?

This study examines the impacts of the population age groups of 20–34, 35–49, 50–64 and 65–79 on the per capita energy use of the oil-exporting countries of Commonwealth Independent States: Azerbaijan, Kazakhstan and Russia employing the modified-STIRPAT framework. Considering that estimations using non-stationary data may yield spurious results, unlike many prior STIRPAT studies, we explore integration and cointegration properties of the data and then estimate long- and short-run elasticities as well as speed of adjustment coefficients. Since our time series analysis covers only 23 observations (1990-2012), as a robustness check, we also conduct panel data analysis by pooling the mentioned countries data with that for members of Organization of Petroleum Exporting Countries. We apply the Autoregressive Distributed Lags Bounds Testing approach in the time series analysis and Pooled Mean Group estimator in the panel analysis, both are superior in small samples. The findings from the time series analysis are supported by those from the panel data analysis. According to the results, there is cointegrated relationship among the variables. The age groups together with affluence and oil prices have statistically significant impacts on the per capita energy use in the selected countries. Moreover, we find the speed of adjustments exhibiting different magnitudes for different countries depending on which population age group is considered. The findings suggest that policymakers should pay special attention to the population age groups of 35–49 and 50–64, as they have a large effect on per capita energy use. Since these groups are the main part of the working age population, increase in their energy consumption is likely to lead to economic growth. Furthermore, the policymakers should take into consideration the finding that speed of adjustments towards an equilibrium path is quite high. It implies that any policy related shocks to the per capita energy use relationship could disappear within a year or even sooner.     

Do the global stochastic trends drive the real house prices in OECD countries?

This paper demonstrates that in the long-run the main determinants of the real housing prices for a panel dataset comprising the quarterly observations of 12 OECD countries are the real GDP per capita and the real interest rate along with the global stochastic trends.     

Do elites benefit from democracy and foreign aid in developing countries?

A popular argument for the absence of any beneficial effects of foreign aid is that it is skimmed by political elites in recipient countries. However, studies also suggest that aid may be more effective in relatively democratic developing countries. By exploring data on income quintiles derived from the World Income Inequality Database for 88 developing countries, a set of results indicate that foreign aid and democracy in conjunction are associated with a higher share of income held by the upper quintile. It thus appears that foreign aid, contrary to popular beliefs, leads to a more skewed income distribution in democratic developing countries while the effects are negligible in autocratic countries. The paper closes with a discussion of potential mechanisms generating this perverse effect.     

Do countries belonging to the same region suggest the same growth enhancing variables? Evidence from selected South Asian countries

We investigate the growth enhancing variables in a group of countries belonging to the same geographical area namely, India, Sri Lanka, Pakistan and Bangladesh over the period 1960–2010. We find that this “homogeneity” does not necessarily imply that countries have the same growth enhancing variables due mainly to differences in institutions and policies. Our result suggests that time-series econometrics are preferable to identify the growth drivers for a country accurately.     

How elastic are national corporate income tax bases in OECD countries? The role of domestic and foreign tax rates

Abstract To what extent do reductions in corporate income tax (CIT) rates attract foreign tax bases? What are the revenue implications of a unilateral tax reduction when tax bases are internationally mobile? These questions are explored using annual data from 17 OECD countries spanning the period 1982 to 2005. Controlling for fixed country effects, year effects, and country time trends, and subjecting our results to an extensive robustness analysis, we find (i) a country’s aggregate reported corporate profits are negatively and significantly affected by CIT rate reductions in neighbouring countries; (ii) a unilateral reduction in the domestic CIT rate results in lower domestic CIT revenues.     

Is the optimal income tax regressive?

A class of solutions that violates the standard results on the sign and shape of optimal tax-rates is shown to be less exceptional than what might be expected, thus casting doubt on the general necessity of qualitative features of income tax-schedules accepted heretofore.     

Does eliminating international profit shifting increase tax revenue in high-tax countries?

We analyze under what conditions initiatives intended to eliminate profit shifting (such as the OECD BEPS action plan and the more recent European implementation of the ATAD) can be successful, given that these actions may induce multinational companies to relocate activities to low-tax countries. We demonstrate that removing tax-motivated profit shifting increases tax revenue in the onshore region if the low-tax jurisdiction is not too efficient in providing attractive infrastructure. This outcome is more easily achieved when the high-tax country is able to counter the shifting of international activity using infrastructure investment to compete with the tax haven rather than being passive. International regulations aimed at combating aggressive tax avoidance should anticipate the adverse effects induced by the resulting emergence of other forms of base erosion.     

Exchange-rate volatility and export performance: Do emerging market economies resemble industrial countries or other developing countries?

Authors who do not distinguish between Emerging Market Economies (EMEs) and other developing countries, find evidence of negative and significant effects of exchange-rate volatility on trade. We investigate the effects of real exchange-rate volatility on exports of ten EMEs and eleven other developing countries that were not classified as EMEs over our estimation period. We use panel-data sets that cover the periods 1980:Q1–2006:Q4 for the EMEs and 1980:Q1–2005:Q4 for the other developing countries. We use two estimation methods — generalized method of moments (GMM) estimation and time-varying-coefficient (TVC) estimation. The TVC procedure removes specification biases from the coefficients, revealing the underlying stable parameters of interest. We obtain similar results as previous authors for only the eleven non-EME developing countries we consider. In contrast, our results for the EMEs do not show a negative and significant effect of exchange-rate volatility on the exports of the countries considered. Our findings suggest that the open capital markets of EMEs may have reduced the effects of exchange-rate fluctuations on exports compared with those effects in the cases of other developing countries.