The Credit Channel of Capital Tax Policy

A neoclassical growth model is augmented by a corporate sector, financial intermediation, and a set of tax rates. In this setting, capital structure is determined by the interplay between a tax advantage of debt finance and costly state verification entailed by asymmetric information. Effects of capital tax reforms are investigated with a special focus on this micro‐founded credit channel of tax policy. The theoretical part of the paper establishes a new, institution‐based view on the motivation of debt finance in general equilibrium and derives financial and real effects of private and corporate income tax policies. Using a calibration with U.S. data, the applied part demonstrates that tax cuts cause significant adjustments of capital structure. Nevertheless, it turns out that the credit channel generates relatively small effects of tax reforms on consumption, investment, and growth.     

Does dividend tax impede competition for corporate charters?

We develop a model of jurisdictional competition for corporate charters among the states in which a firm’s agency cost depends on the federal dividend income tax rate and the takeover regulations of its domicile state. When firms are mobile across states, the federal dividend income tax rate affects both the intensity of competition among the states and the equilibrium level of state takeover regulations. Our model shows that increasing dividend tax rate weakens the competition for corporate charters under a condition: dividend-paying and the market for corporate control are complementary corporate governance mechanisms. This condition holds empirically, suggesting that dividend tax not only discourages firms from paying dividends but also weakens their corporate governance by disincentivizing states to improve their corporate laws.     

Dividend taxes,corporate investment,and ‘Q’

Taxes on corporate distributions have traditionally been regarded as a ‘double tax’ on corporate income. This view implies that while the total effective tax rate on corporate source income affects real economic decisions, the distribution of this tax burden between the shareholders and the corporation is irrelevant. Recent research has suggested an alternative to this traditional view. One explanation of why firms in the United States pay dividends in spite of the heavy tax liabilities associated with this form of distribution is that the stock market capitalizes the tax payments associated with corporate distributions. This capitalization leaves investors indifferent at the margin between a corporation's decision to pay out dividends or to retain earnings. This alternative view holds that while changes in the dividend tax rate will affect shareholder wealth, they will have no impact on corporate investment decisions.This paper develops econometric tests which distinguish between these two views of dividend taxation. By extending Tobin's ‘q’ theory of investment to incorporate taxes at both the corporate and personal levels, the implications of each view for corporate investment decisions can be derived. The competing views may be tested by comparing the performance of investment equations estimated under each theory's predictions. British time series data are particularly appropriate for testing hypotheses about dividend taxes because of the substantial postwar variation in effective tax rates on corporate distributions. The econometric results suggest that dividend taxes have important effects on investment decisions.     

The German Business Tax Reform of 2000: A General Equilibrium Analysis

In the year 2000 Germany enacted a major tax reform involving significant cuts in corporate and personal tax rates and a controversial change in the system of dividend taxation. This paper discusses the effects of the business tax reform on the German economy. The analysis is based on a detailed general equilibrium model of the OECD economy which is designed to illustrate the domestic and international effects of national tax policies. The simulations indicate that the German business tax reform will raise domestic economic activity and welfare, although the welfare gain will accrue disproportionately to households with a high ratio of property income to total income.     

Why is the corporate tax rate lower than the personal tax rate?: The role of new firms

In many OECD countries, statutory corporate tax rates are lower than personal income tax rates. This tax rate difference is often particularly large for small firms. The present paper argues that a reduction of the corporate tax rate below the personal tax rate is an optimal tax policy if there are problems of asymmetric information between investors and firms in the capital market. The reduction of the corporate tax rate below the personal tax rate encourages equity financing and thus mitigates the excessive use of debt financing induced by asymmetric information. Our main theoretical result stands in marked contrast to the traditional view of corporate taxation and corporate finance theory, according to which there is a tax disadvantage to equity financing. More recent empirical evidence on this issue, however, is in line with our result.     

Taxes and firm investment

We investigate the firm-level investment response to unanticipated narrative shocks to average personal and corporate tax rates using a universal micro dataset of publicly-traded U.S. firms for the post-1976 period. Using local projections, we show that: (i) corporate tax shocks have significant effects on investment while personal tax shocks do not; (ii) corporate income tax responses are negative overall, and this result is driven by smaller firms who face larger borrowing constraints, especially when the accompanying monetary policy is contractionary or output gap is slack; (iii) there is some evidence of positive personal income tax responses during monetary contractions by dividend-paying firms, which is consistent with the recent literature.     

Employment- and growth effects of tax reforms

Since the mid-1990s almost all OECD countries have engaged in fundamental reforms of their tax systems. There is a trend towards higher social security contributions and lower tax rates on personal and corporate income. This paper explores whether these tax policy measures are effective means for reducing unemployment and accelerating economic growth. Using a Pissarides type search model with endogenous growth, we analyze how savings and the incentive to create new jobs are affected by revenue-neutral tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, cutting the capital income tax (reducing the double taxation of dividend income) financed by a higher payroll tax turns out to be superior, such a policy mix fosters both employment and growth. Most other tax reforms imply a trade-off between employment and growth.     

The benefits and costs of the deferral of U.S. Taxes on retained earnings of controlled foreign corporations

This paper develops and applies a model to measure the effects of deferral on world and U.S. incomes. It is assumed that elimination of deferral would be accompanied by a compensating reduction in the U.S. corporate income tax rate which would leave the overall tax burden of corporations unchanged. The results of the model support several conclusions: Deferral has a positive net effect on world income, but has a negative effect on U.S. income; over two-thirds of the income gains of foreign countries due to deferral goes to developed or oil-exporting countries; and the Tax Reform Act of 1976 has roughly doubled the importance of deferral.     

AN ESTIMATION OF U.S. FAMILY WEALTH AND ITS DISTRIBUTION FROM MICRODATA, 1973

This paper presents a method of estimating U.S. family net wealth across the entire population, utilizing capitalization of several income items available from income tax microdata. Other forms of wealth, and debt, are indirectly estimated using relationships gleaned from estate tax data. Concentration in the distribution of wealth, and assets such as corporate stock, are measured with Gini coefficients and Lorenz curve analysis and compared to similar estimates of concentration in the distribution of income. Comparisons of the results with previous estimates for the United States are made in the latter section of the paper.     

A spatial analysis of provincial corporate income tax responses: evidence from Canada

Abstract.  Using a model of interdependent tax choices, and accounting for equalization entitlements and general transfers, this paper estimates – making use of a spatial econometric framework – corporate income tax-setting functions for all Canadian provincial governments. The results show that there is a statistically significant positive fiscal interaction among a subset of provinces and between all provinces and the federal government. Provincial corporate income taxes are also found to be negatively related to equalization entitlements, general federal transfers, and the federal corporate income tax. A robustness check on the fiscal relationship between Ontario and Quebec verifies the existence of significant bi-directional fiscal interdependencies. The paper also introduces U.S state corporate income taxes as covariates and examines their interaction with Canadian provinces.     

The Finnish Corporate Income Tax Reform and the Financial Strategy of Firms: A General Equilibrium Approach

This paper simulates the effects of the recent Finnish corporate tax reform with a computable general equilibrium model. It shows that the impact of the reform on the capital stock depends on the reactions of firms. If the financial strategy is changed to prefer dividend distribution and share issues, the cost of capital falls and the capital stock increases. On the other hand, if the criterion of financial policy is to minimise the welfare loss of current shareholders, the earlier financial behaviour should be continued. In that case,the induced higher cost of capital leads to a lower capital stock. The overall welfare evaluation of the tax reform is not sensitive to the regime shift: the reform should not have been implemented. This is because the increase in interest income taxation distorts saving decisions, expands the net foreign debt of the economy and weakens the terms of trade.     

生态赤字税：绿色发展与税制改革*

本文在量化生态占用并评估生态价值基础上,提出运用税收实现超额生态占用价值补偿的税收方案,也称生态赤字税。根据税制生态化的改革思路,本文运用CGE模型分析了征收生态赤字税和降低所得税的政策效应。本文研究发现：(1)在各税收方案中,生态赤字减少,就业增加,支持双重红利假说,全行业中间投入减少相对总产出减少更大,名义GDP保持增长;(2)实际GDP在生态赤字税基础上仅减少企业所得税的方案中下降,同时减少个人所得税则能实现增长,此时减税额低于生态赤字税收入;(3)在开征生态赤字税同时,降低个人所得税在保持经济增长方面较好,降低企业所得税在减少生态赤字方面较好,但降低企业所得税所减少的生态赤字价值低于降低个人所得税时劳动和资本增加值的提高。本文建议在完善生态占用核算基础上开征生态赤字税,并减轻所得税,促进经济增长由资源环境消耗转向劳动和资本投入的绿色发展。     

A TALE OF TAX POLICIES IN OPEN ECONOMIES

To evaluate fiscal policy reforms for Euro‐area countries, this article develops and calibrates a small open economy model. Debt reduction reforms require higher tax rates in the short term in exchange for lower rates in the long term as the debt‐servicing burden falls. Using the capital income tax to implement such a policy leads to welfare gains; the consumption tax, a very small welfare gain; and the labor income tax, a welfare loss. Holding fixed the long‐run debt–output ratio, offsetting a lower capital income tax with either a higher labor income or consumption tax generally yields welfare gains.     

The repatriation incentive of the foreign dividend exemption system

Due to the high taxation of domestic corporate income, Japanese multinational enterprises have avoided to repatriate foreign profits to Japan for quite some time. As a consequence, the Japanese government introduced a new taxation system in 2009 – the so called dividend exemption system – which was aimed at reducing the effective tax burden of foreign dividends of Japanese multinational companies in order to increase tax revenue and stimulate economic growth. Applying a theoretical framework which allows comparing the repatriation incentive of the old and new Japanese tax systems, we find that in the long-run the tax regime change fails to incentivize foreign subsidiaries to repatriate foreign profits. Especially subsidiaries with high leverage located in countries with low corporate taxes and low dividend taxes might reinvest rather than distribute their earnings in the dividend exemption method.     

International corporate taxation and U.S. multinationals' behaviour: an integrated approach

Abstract .  This paper explores the effects of corporate taxation on U.S. capital invested abroad and on tax planning practices. The econometric analysis first indicates that investment is strongly influenced by average tax rates, with a magnified impact particularly for low-tax rates, implying that the attractiveness of low-tax countries is not weakened by anti-deferral rules and cross-crediting limitations. Further explorations suggest that firms report higher profit, higher Subpart F income, and are less likely to repatriate dividends when they are located in low-tax jurisdictions. Finally, when the role of effective transfer pricing regulations is estimated, it appears that low degrees of law enforcement are associated with higher income shifting.     

The taxation of capital income in an open economy: the importance of resident-nonresident tax treatment

The authors develop a simulation model of the United States and the rest of the world to demonstrate how international capital mobility alters the incidence and capital formation incentives of taxes on capital income. The model explicitly recognizes that U.S. and foreign investors hold a different mix of assets in each country. Only a modest degree of international mobility is necessary to substantially alter closed-economy patterns of tax incidence. Differences in the tax treatment of residents and foreigners are particularly important in evaluating tax reductions at the individual level or the integration of corporate and individual income taxes.     

税收负担对企业固定资产投资的影响——基于税种差异视角的研究

本文以2003—2018年中国上市企业数据为样本,从税种差异视角分析了增值税有效税率与企业所得税有效税率变化对企业固定资产投资的影响。研究发现,增值税有效税率与企业固定资产投资的关系依赖于宏观经济环境和企业税负转嫁能力。具体而言,在经济上行期或税负转嫁能力较强的企业中,增值税有效税率降低促进了企业固定资产投资增加。所得税有效税率与企业固定资产投资之间始终为显著负相关关系。所得税有效税率的降低可以通过增强企业内外部融资能力来促进其固定资产投资增加,特别是当企业债务风险相对较低时,所得税有效税率下降对固定资产投资的正向影响效果会随企业融资约束程度的上升而增大。本文分析在一定程度上说明了不同税种的税负变化对企业投资产生差异化影响,进而为减税助力企业投资提供了新的微观经验证据。     

The consequences of an unknown debt target

Several proposals to reduce U.S. debt reveal large differences in their targets. We examine how an unknown debt target affects economic activity using a real business cycle model in which Bayesian households learn about a state-dependent debt target in an endogenous tax rule. Recent papers use stochastic volatility shocks to study fiscal uncertainty. In our setup, the fiscal rule is time-varying due to unknown changes in the debt target. Households infer the current debt target from a noisy tax rule and jointly estimate the transition probabilities. Three key findings emerge from our analysis: (1) limited information about the debt target amplifies the effect of tax shocks through changes in expected tax rates; (2) the welfare losses are an order of magnitude larger when both the debt target state and transition matrix are unknown than when only the debt target state is unknown to households; (3) an unknown debt target likely reduced the stimulative effect of the ARRA and uncertainty about the sunset provision in the Bush tax cuts may have slowed the recovery and led to welfare losses.     

Efficient timing of income taxes

The marginal collection cost of an income tax is predicted to be a martingale, and the marginal income tax rate is predicted to be a supermartingale. Collection costs can be estimated from tax rates. Almost all tests based on a U.S. series of actual marginal income tax rates, 1913–1975, accept the hypothesis of random-walk behavior in collection costs, and reject the parallel hypothesis on tax rates.     

Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada

We study corporate income taxation when firms operating in multiple jurisdictions can shift income using tax planning strategies. Because income of corporate groups is not consolidated for tax purposes in Canada, firms may use financial techniques, such as lending among affiliates, to reduce subnational corporate taxes. A simple theoretical model shows how income shifting affects real investment, government revenues, and tax base elasticities, depending on whether firms must allocate income to provinces or not. We then analyze data from administrative tax records to compare the behavior of corporate subsidiaries that may engage in income shifting to comparable firms that must use the statutory allocation formula to determine their taxable income in each province. The evidence suggests that income shifting has pronounced effects on provincial tax bases. According to our preferred estimate, the elasticity of taxable income with respect to tax rates for “income shifting” firms is 4.9, compared with 2.3 for other, comparable firms.