Financial leverage and corporate taxation: evidence from German corporate tax return data

To estimate the impact of profit taxation on the financial leverage of corporations, this study uses a pseudopanel constructed from comprehensive corporate tax return microdata for the period 1998–2001, which saw the introduction of major corporate tax reform in Germany. Financial leverage refers to the ratio of long-term debt to total capital. The endogeneity of the firm-specific marginal after-financing corporate income tax rate is controlled for by an instrumental variable approach. The instrument for the observed marginal tax rate is the counterfactual tax rate that a corporation would have faced in a particular period had there been no endogenous change, triggered by the tax reform, of its financial leverage and tax base. This counterfactual tax rate is derived from a detailed microsimulation model of the corporate sector, based on tax return microdata. The marginal tax rate has a statistically significant and relatively large positive effect on corporate leverage; for firms reporting positive profits, an increase of the marginal tax rate of 1 % would increase the financial leverage by approximately 0.7 %, on average. The debt ratio is less responsive to tax incentives for small corporations and firms facing high economic risks.     

Direct evidence on the marginal rate of taxation on dividend income

Miller and Scholes (1978) hypothesize that the marginal tax rate on dividend income may be less than the marginal rate of tax on capital gains. Their hypothesis is dependent upon individuals utilizing existing provisions of the Code which serve to reduce the taxation of dividends. In this study, estimates of the marginal and effective rates of tax on dividend income for the year 1979 are presented using the Statistics of Income sample of returns. The average marginal rate of tax on dividend income is estimated to be 40%, while the average effective rate of tax is estimated to be 30%.     

Tax Reform and the Demand for Debt

This article examines the impact on household borrowing from a tax reform that implied a change from progressive to constant marginal tax rates on interest deductions. We use three alternative empirical methods to address the problem of endogenous explanatory variables, which arises when the marginal tax rate itself is a function of the amount of debt: The first approach uses instrumental variables to examine the significance of the marginal tax rate directly and produces mixed results. In the second approach we use tobit regressions based on repeated cross-sectional data to examine the correspondence between debt and income and find that the households' amount of debt were strongly and positively related to income before the tax reform and significantly more income-dependent under progressive tax rates than under the constant tax rate. Finally, using panel data covering the last year prior to the reform and the first year after, we find that the change in a household's marginal tax rate had a significant impact on the change in its amount of debt.     

Labor-dependent capital income taxation

Capital taxation which is negatively correlated with labor supply is proposed. This paper uses a life-cycle model of heterogeneous agents that face idiosyncratic productivity shocks and shows that the tax scheme provides a strong work incentive when households possess large assets and high productivity later in the life-cycle, when they otherwise would work less. The system also adds to the saving motive of prime-age households and raises aggregate capital. The increased economic activities expand the tax base and the revenue neutral reform results in a lower average tax rate. The negative cross-dependence generates a sizable welfare gain in the long-run relative to the tax system that treats labor and capital income separately as a tax base. The reform, however, can hurt the elderly during the transition with a high marginal tax on their capital income.     

Labor tax reform, unemployment, and search

A key obstacle to reducing payroll taxes in many industrialized and transition countries is the direct revenue loss to the government that it implies. This paper studies a simple and practical labor tax reform of reducing a payroll tax and increasing a progressive wage tax that keeps the marginal tax wedge unchanged. Such a strategy increases employment, reduces the equilibrium unemployment rate, and increases public revenue as long as workers do not have all the bargaining power in wage negotiations. Moreover, welfare rises if workers’ bargaining power is sufficiently large to exceed a critical value determined by the second-best Hosios condition.      

中美比较视域下个人所得税制演进逻辑与改革效应

美国个人所得税制历经百年发展,其税制模式、税率结构以及费用扣除等方面日臻成熟、完善,且充分体现了宏观经济和社会发展的要求,发挥了较好的财政收入和收入再分配职能。比较分析中美两国个人所得税演进逻辑及改革效应,可以看出中国个人所得税制有待完善。借鉴美国税制模式,改革与完善中国个人所得税制的方向为:逐步向"综合个人所得税制"转变;降低税率的档次和边际税率;完善费用扣除制度;加大税收征管力度等。     

An analysis of nondeductible IRA contributions and Roth IRA conversions

On average investors have an income replacement rate of 64% of their pre-retirement income, which in many cases results in a lower tax rate in retirement. We analyze the impact of declining withdrawal tax rates on the choice between taxable mutual fund investments and nondeductible IRAs. The relative attractiveness of the taxable mutual fund option declines significantly when withdrawal tax rates decline. Converting existing IRAs to Roth IRAs is generally beneficial for investors who remain in the same tax bracket upon withdrawal. For short (long) time horizons and low (high) expected returns, the marginal value of conversion in 1998 is greater (less) than the marginal value of optimal conversion. For investors dropping into the 15% tax bracket, conversion is generally not beneficial unless the conversion is done optimally, the time horizon is long, and the expected return is high. Investors in the 15% tax bracket should convert existing IRA assets.     

The Evolution of the Tax Structure of a Reforming Transitional Economy: Hungary 1988–98

The paper analyses the revenue-raising, distributional and incentive effects of the personal tax system in Hungary from the start of the transitional tax reforms of 1988 to 1998, and shows that the tax structure has converged to an almost linear form similar to the more heavily taxed EU countries. The 1998 pension reform has reversed a trend increase in average and marginal tax rates but marginal rates still appear too high for a country wishing to encourage growth and employment creation.     

ESTIMATING THE TAX BENEFITS OF DEBT

The standard approach to valuing interest tax shields assumes that full tax benefits are realized on every dollar of interest deduction in every scenario. The approach presented in this paper takes account of the possibility that interest tax shields cannot be used in some scenarios, in part because of variations in the firm's profitability. Because of the dynamic nature of the tax code (e.g., tax-loss carrybacks and carryforwards), it is necessary to consider past and future taxable income when estimating today's effective marginal tax rate. The paper uses a series of numerical examples to show that (1) the incremental value of an extra dollar of interest deduction is equal to the marginal tax rate appropriate for that dollar ; and (2) a firm's effective marginal tax rate (and therefore the marginal benefit of incremental interest deductions) can actually decline as the firm takes on additional debt.
Based on marginal benefit functions for thousands of firms from 1980–1999, the author concludes that the tax benefits of debt averaged approximately 10% of firm value during the 1980s, while declining to around 8% in the 1990s. By taking maximum advantage of the interest tax shield, the average firm could have increased its value by approximately 15% over the 1980s and 1990s, suggesting that the consequences of being underlevered are significant. Surprisingly, many of the companies that appear best able to service debt (i.e., those with the lowest apparent costs of debt) use the least amount of debt, on average. Treasurers and CFOs should critically reevaluate their companies' debt policies and consider the benefits of additional leverage, even if taking on more debt causes their credit ratings to slip a notch.     

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.     

Evaluating Tax Policy for Location Decisions

We consider the impact of taxation when investors face a discrete choice between two or more mutually exclusive projects; in particular we consider the location choice of multinationals. Such choices depend on an effective average tax rate. We propose a precise measure of this rate, which is shown to be equal to a weighted average of an effective marginal tax rate and an adjusted statutory tax rate, where the weights depend on the profitability of the investment. Estimates of the distribution of this measure are presented and compared for domestic and international investment in the USA, France, Germany and the UK. We analyse the impact of harmonising corporate tax rates in Europe on incentives to locate in France, Germany and the UK.     

Joint Taxation and the Labour Supply of Married Women: Evidence from the Canadian Tax Reform of 1988*

The Canadian federal tax reform of 1988 replaced a spousal tax exemption with a non‐refundable tax credit. This reduced the‘jointness’of the tax system: after the reform, secondary earners’effective‘first dollar’marginal tax rates no longer depended on the marginal tax rates of their spouses. In practice, the effective‘first dollar’marginal tax rates faced by women with high‐income husbands were particularly reduced. Using difference‐indifference estimators, we find a significant increase in labour force participation among women married to higher‐income husbands.     

A Cost-Benefit Analysis of the Thailand Taxpayer Survey

We investigate whether more resources should be devoted to a Thai tax enforcement program which is aimed at bringing small businesses into the tax system. We show that the appropriate criteria for determining whether more resources should be devoted to tax enforcement is whether the Atkinson–Stern condition for the optimal provision of a publicly-provided good is satisfied, or equivalently, whether the marginal cost of finds obtained through additional tax enforcement, SMCF_p, is less than the marginal cost of funds obtained through raising tax rates, SMCF_t. In our base case scenario, the SMCF_p is 11.60 which exceeds our estimate of the SMCF_t for an across-the-board increase in income tax rates on wage earners. The use of pro-poor distributional weights makes expanding the survey less attractive if the alternative way of obtaining additional tax revenue is an across-the-board income tax rate increase, while aversion to tax evasion makes it more attractive.     

Indirect Taxation in Greece: Evaluation and Possible Reform

The paper assesses the distributional and efficiency/disincentive aspects of the Greek indirect tax system, which provides 60% of total tax revenue. The marginal welfare costs of broad commodity groups were computed to identify welfare-improving directions of reform. The disincentive effects were estimated from marginal indirect tax rates using Household Expenditure Survey data. The indirect tax structure is shown to be unnecessarily complicated and inefficient, without achieving any redistributive goals. The UK indirect tax structure was shown to be simpler, more equitable and more efficient to implement and administer when simulated on Greek consumers.     

Indirect tax reform and the specification of demand: the case of Ireland

This paper examines the sensitivity of marginal tax reform analysis to changes in the underlying demand system. In particular, we analyse the sensitivity of results from Ahmad and Stern’s (J Publ Econ 25(3):259–298, 1984) marginal tax reform model to different specifications of Deaton and Muellbauer’s (Am Econ Rev 70(3):312–326, 1980) Almost Ideal Demand System (AIDS) and Banks et al.’s (Rev Econ Stat 79(4):527–539, 1997) Quadratic AIDS. Using Irish Household Budget Survey data, we show that tax reform results exhibit a low degree of sensitivity to changes in the underlying demand system. An adjustment for a mass of observed zero-expenditures in the data for certain goods produces most sensitivity in the tax reform results. Even in these cases, many of the tax reform recommendations remain constant. Including demerit good arguments in the tax reform model can substantially alter the tax reform recommendations relating to demerit goods. Notably though, when we include these arguments in the tax reform model, the results are particularly insensitive to changes in the underlying demand system.     

Optimal redistributive tax and education policies in general equilibrium

This paper studies optimal linear and non-linear income taxes and education subsidies in two-type models with endogenous human capital formation, endogenous labor supply, and endogenous wage rates. Assuming constant human capital elasticities, human capital investment should be efficient under optimal linear policies, whether general equilibrium effects are present or not. Hence, education subsidies should not be used for distributional reasons. Due to general equilibrium effects, optimal linear income taxes may even become negative. Optimal non-linear policies exploit general equilibrium effects for redistribution. The high-skilled type optimally has a negative marginal income tax rate and a positive marginal education subsidy. The low-skilled type optimally faces a positive marginal income tax rate and a marginal tax on education. Simulations demonstrate that general equilibrium effects have only a modest effect on optimal non-linear policies.     

Human capital and optimal positive taxation of capital income

This paper analyzes optimal linear and non-linear taxes on capital and labor incomes in a life-cycle model of human capital investment, financial savings, and labor supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labor income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labor tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labor income if savings are elastic compared to investment in human capital, substitution between verifiable and non-verifiable inputs in human capital formation is difficult, and most investments in human capital are verifiable so that education subsidies can directly reduce the tax wedge on learning. Numerical calculations suggest that the optimal marginal tax rate on capital income is substantial.     

财政压力、企业要素投入扭曲与经济绩效

本文利用中国取消农业税改革作为准自然实验,探讨区县级政府财政压力对政府决策和微观企业资源配置的影响,进而分析由此带来的宏观经济绩效影响效应。研究发现:地方政府行为受到财政压力的影响,农业税改革带来的财政压力使企业资本要素投入的边际收益和边际成本的缺口上升5.72%,企业资本要素投入不足情况加剧,而对劳动要素投入的影响并不显著;进一步的机制分析表明,财政压力对企业资本要素投入的扭曲效应更多源于税收征管提高、环境规制放松、交易费用增加和企业规模分布变异,这一干扰效应最终导致经济总量生产率平均下降约19.32%。     

Optimal tax policy when firms are internationally mobile

The standard tax theory result that investment should not be distorted is based on the assumption that profits are locally bound. In this paper, we analyze the optimal tax policy in a model where firms are internationally mobile. We show that the optimal policy response to increasing firm mobility may be taxation, subsidization, or non-distortion of the marginal investment, depending on whether the mobile firms are more or less profitable than the average firm in the economy. Our findings may contribute to understanding recent tax policy developments in many OECD countries.