Taxpayers' Prepayment Positions and Tax Return Preparation Fees*

Individuals who have their tax returns professionally prepared often overpay estimated income taxes, effectively giving the government an interest‐free loan. To understand why tax professionals may place their clients in positive prepayment positions, we draw on mental accounting theory. Mental accounting theory suggests that by placing taxpayers in positive prepayment positions, tax professionals induce a favorable mental representation of tax return preparation fees, perhaps allowing them to collect larger fractions of billable time and costs incurred on taxpayers' behalves. Thus, we hypothesize that tax return preparation fees are higher for taxpayers in positive prepayment positions than for taxpayers in negative prepayment positions. Regression results using tax return data for 68,736 taxpayers provide strong support for this hypothesis. To more fully understand the general nature of the relationship between taxpayers' prepayment positions and tax return preparation fees, we adapt the prospect theory value function to the tax domain and formulate three additional hypotheses. Consistent with theory, regression results indicate that the relation between taxpayers' prepayment positions and tax return preparation fees is (1) positive, (2) stronger for taxpayers who receive refunds that are less than fees than it is for taxpayers who receive refunds that are greater than fees, and (3) stronger for taxpayers in negative prepayment positions than for taxpayers in positive prepayment positions.     

Revenue Effects of Tax Facilities for Pension Savings

Many countries have tax facilities for pension savings. These facilities are often associated with the application of the cash-flow treatment of pensions: pension contributions are tax-exempt, capital income of pension funds is tax-exempt, and pension benefits are taxed, but usually at a relatively low rate. This paper investigates the revenue effects of a cash-flow tax regime for pension savings by full present-value calculations. A comprehensive income tax system is used as a benchmark. We present an empirical analysis for the Netherlands as a typical example of a country with funded pensions. Our calculations show that current taxation of pensions implies a major tax revenue loss. For the year 2003, we estimate a fiscal pension subsidy of 1.4% to 1.5% of Gross Domestic Product (GDP).

Effects of Patent Protection on Optimal Corporate Income and Consumption Taxes in an R&D‐Based Growth Model

Does reducing the corporate income tax accompanied by an increase in the consumption tax to meet the government's budget constraint improve welfare? To respond, we examine the welfare‐maximizing corporate income tax and consumption tax rates in an R&D‐based growth model under the constraint that the government's budget is balanced at each point of time. Further, we consider how welfare‐maximizing tax rates change as patent protection becomes stronger, as seen in many countries. The results show that as patent protection becomes stronger, the corporate income tax rate should be higher and the consumption tax rate should be lower. This implies that under stronger patent protection, recovering production at the expense of innovation by raising corporate income tax and reducing consumption tax improves welfare.     

Transfer Pricing: Strategies,Practices, and Tax Minimization

Using a survey of tax executives from multinational corporations, we document that some firms set their transfer pricing strategy to minimize tax payments, but more firms focus on tax compliance. We estimate that a firm focusing on minimizing taxes has a GAAP effective tax rate that is 6.6 percentage points lower and generates about $43 million more in tax savings, on average, than a firm focusing on tax compliance. Available COMPUSTAT data on sample firms confirm our survey‐based inferences. We also find that transfer pricing‐related tax savings are greater when higher foreign income, tax haven use, and R&D activities are combined with a tax minimization strategy. Finally, compliance‐focused firms report lower FIN 48 tax reserves than tax‐minimizing firms, consistent with the former group using less uncertain transfer pricing arrangements. Collectively, our study provides direct evidence that multinational firms have differing internal priorities for transfer pricing, and that these differences are strongly related to the taxes reported by these firms.     

Fringe benefits and employee expenses: Tax planning and neutral tax policy*

Abstract. This paper constructs a decision model for fringe benefits and employees' work-related expenses that considers the tax positions of both the employer and the employee. The analytical results obtained can be used to guide tax planning in this area. The decision model is also used to derive tax rules that neither subsidize the provision of fringe benefits nor penalize employees for incurring work-related expenses. Based on results from the economic theory of rationing, the paper shows that the information required to implement these rules can be obtained from econometric estimates of consumer demand functions. Résumé. L'auteur construit un modèle décisionnel s'appliquant aux avantages sociaux et aux dépenses engagées par les employés dans le cadre de leur travail et quitient compte de la situation fiscale de l'employeur aussi bien que de celle de l'employé. Les résultats analytiques obtenus peuvent servir de guide dans la planification fiscale à cet égard. Le modèle décisionnel est également utilisé pour dériver des règles fiscales qui ne subventionnent pas les avantages sociaux ni ne pénalisent les employés qui engagent des dépenses dans le cadre de leur travail. En s'appuyant sur les résultats de la théorie économique du rationnement, l'auteur démontre que l'information requise pour mettre ces règles en application peut être obtenue à partir d'estimations économétriques des fonctions de demande du consommateur.     

The Effect of Changes in Income Shifting on Affiliate Managers' Internal Reporting Decisions*†

This study examines the interplay between tax and internal reporting incentives among affiliates of multinational corporations (MNCs). MNCs face limited information flows that may prevent affiliates' performance metrics to be responsive immediately to changes in the firm's tax planning. Using granular data of affiliates belonging to MNCs from 21 European countries, our study provides new empirical evidence of affiliate internal reporting responses induced by changing tax plans. When high-tax-rate countries tighten income shifting rules, we first document that income shifting is reduced and low-tax-rate affiliates have less income. Second, we predict and document that managers of these low-tax-rate affiliates offset this decrease in profits by managing upwards a key performance metric: affiliate earnings. Our results are consistent with firms not quickly adjusting the affiliate managers' incentives in the face of changing tax planning strategies, and affiliates managing reported earnings to offset the effect of changes in the tax planning of the firm. Cross-sectional analyses provide further evidence consistent with the theory underlying the main tests. The results support the policy of tightening income shifting rules when the objective is to reduce income shifting, and firms' central management would benefit from considering the implications of changing tax plans on the assessment of local managers.     

农村居民多维收入流动、税费负担及政策效应——基于面板数据PSM-DID方法的研究

收入流动性是从动态视角衡量居民收入分配公平与否的重要指标,其变动程度受到税收等因素的影响。文章基于2001年至2014年季度和年度面板数据,依据多维收入流动指标,测算出了地区之间农村居民绝对和相对收入流动程度,并利用双重差分倾向得分匹配法（PSM-DID）和工具变量估计法研究了农村税费改革及其他经济社会因素对农村居民收入流动性的影响。研究发现：（1）农村税费改革的政策效应非常显著,实施农业税费减免政策的地区,其农民的绝对收入流动性显著高于未改革地区;（2）税费负担对绝对收入流动性的影响呈现出"倒U型"特征,即当税费负担率为0.167%时,绝对收入流动性达到最大值,若进一步增加税费负担,收入流动性则呈现下降趋势;（3）税费支出变动对相对收入流动性的影响也通过了5%的显著性检验;（4）农村劳动力文化结构、工资收入比重等家庭特征因素对收入流动性的影响具有较大的地区异质性。有鉴于此,在进一步完善税费征收项目监管的同时,依据家庭及地区特征实施差异化的支农惠农政策,切实减轻农民负担,增强农村居民收入流动,实现地区间收入分配均衡。     

A fisherian analysis of individual retirement accounts

Conclusions This paper has employed a Fisherian analysis of intertemporal choice to evaluate the use of IRA's. The analysis shows that with perfect capital markets assumptions, the presence of IRA's will generate no other effect on savings than would a simple tax rabate. Further, it shows that if the tax revenue loss due to IRA's is not accompanied by an expenditure reduction, but is financed with taxes or borrowing, rational households will still employ IRA's, but their effect on intertemporal choice will be nil. The analysis also shows that IRA's do act as a savings incentive to the extent that there are market imperfections, specifically to the degree that transactions costs are important. However, empirical evidence from the literature does not lend firm support to this possibility. The conclusion is that a market imperfection is not a firm basis on which to construct savings incentives. Finally, one can note that the same analysis applies to any tax-based savings incentive that is designed to operate by lowering the tax on interest income. The reason for this finding is that the provision of tax sheltered interest income, along with the deductibility of interest on borrowing, creates general tax arbitrage opportunities for households and that tax arbitrage opportunities do not, in general, generate greater savings in an intertemporal choice model. It follows that significant restriction or elimination of the deductibility of interest on borrowing is a prerequisite for IRA's and other tax based savings incentives to produce their intended effect.     

The Economic Effects of Special Purpose Entities on Corporate Tax Avoidance

This study provides the first large-sample evidence on the economic tax effects of special purpose entities (SPEs). These increasingly common organizational structures facilitate corporate tax savings by enabling sponsor firms to increase tax-advantaged activities and/or enhance their tax efficiency (i.e., relative tax savings of a given activity). Using path analysis, we find that SPEs facilitate greater tax avoidance such that an economically large amount of cash tax savings from research and development (R&D), depreciable assets, net operating loss carryforwards, intangible assets, foreign operations, and tax havens occur in conjunction with SPE use. We estimate that SPEs help generate over $330 billion of incremental cash tax savings, or roughly 6 percent of total U.S. federal corporate income tax collections during the sample period. Interaction analyses reveal that SPEs enhance the tax efficiency of intangibles and R&D by 61.5 percent to 87.5 percent. Overall, these findings provide economic insight into complex organizational structures supporting corporate tax avoidance.     

Welfare cost of higher tax rates: An empirical laffer curve for The Netherlands

Summary On the basis of a simple general equilibrium model calculations are made of the welfare cost of higher tax rates. Furthermore, the Laffer curve for The Netherlands is estimated. Taking 1970 as the basic year and assuming that all tax revenues were paid back in lump-sum benefits, the Laffer curve topped at a marginal rate of 66.9076 and theMEB stood at 1.24. This means that an additional guilder in tax revenues involves a welfare loss of Dfl. 1.24 on top of the direct tax burden. Considering the true proportion of government income being spent on benefits, the Laffer curve is found at a marginal tax-rate of 70.1016. In that case theMEB amounts to 0.83 in 1970. The most striking finding was the sharp rise in theMEB, from 0.83 in 1970 to 6.36 in 1985. This high welfare cost is an indication that The Netherlands is nearing the limits of taxation on income. It is found that market signals are disturbed most when tax revenues are used for income transfers in a form which does not influence allocation decisions at the margin (lump-sum benefits). In that case relative prices are affected, whereas income effects are neutralized.The authors wish to thank Professor F. W. Rutten, J. van Sinderen and other colleagues at the Directorate for Macro-economic Policy of the Ministry of Economic Affairs for their stimulating support and critical remarks. J. Hulsman translated the original Dutch draft.     

Can Simple Informational Nudges Increase Employee Participation in a 401(k) Plan?

We report results from a field experiment in which a randomized subset of newly hired workers at a large financial institution received a flyer containing information about the employer's 401(k) plan and the value of contributions compounding over a career. Younger workers who received the flyer were significantly more likely to begin contributing to the plan relative to their peers in the control group. Many workers do not participate in their employers' supplemental retirement savings programs, even though these programs offer substantial tax advantages and immediate returns due to matching contributions. From a survey of new hires, we find that many workers choose not to contribute to the plan because they have other financial priorities. However, some nonparticipants lack the financial literacy to appreciate the benefit. These findings indicate that simple informational interventions can nudge workers to participate in retirement saving plans and enhance individual well‐being and retirement income security.     

我国税收政策影响初次分配的实证分析

近年来,在我国经济保持持续高速增长的同时,我国居民的收入分配不平等现象也在加剧。税收政策历来都是各国调节收入分配的重要政策杠杆。根据1994～2009年我国的基尼系数、税收收入占GDP比重的时间序列数据,所建立的多元线性回归模型表明,我国现行的以间接税为主体的税制结构,整体上拉大了不同阶层的收入差距。增值税、营业税等税种与基尼系数呈正相关,个人所得税、财产税等直接税也由于征收规模过小、征管存在漏洞等原因,没有充分发挥出直接税应有的收入调节作用。     

Tax Incentives,On-the-job Training,and Human Capital Accumulation: Evidence from China

This study investigates the effects of an increase in the proportion of tax credit (IPTC) policy on firms' on-the-job-training expenses. We document that the IPTC significantly increases on-the-job training expenses; the result remains valid after a series of robustness tests. An analysis of heterogeneous effects shows that privately owned firms and small-scale firms are more susceptible to the IPTC's impacts than state-owned and large-scale firms. Finally, we find that the IPTC can improve the production efficiency of firms and promote firm performance and innovation.     

The Distributional Effects of the Trump and Clinton Tax Proposals

Hillary Clinton and Donald Trump, the Democratic and Republican candidates for President of the U.S. in 2016, proposed several changes in the federal tax code. Hillary Clinton would add a personal income tax surcharge of 4% on high annual incomes, limit the tax benefits of non-charitable deductions, set a minimum tax rate of 30% on taxpayers earning more than one million dollars a year, increase the tax rates on capital gains for taxpayers in the top tax bracket, and expand the base of the estate tax. Donald Trump would reduce the number of personal income tax rates, increase the standard personal deduction, cut all taxes on business income to no more than 15%, and abolish the inheritance tax. Using a tax calculator model, we estimate the static effects of these very different changes. Over a ten-year period, Clinton’s proposals would raise federal tax revenue by a total of $816 billion, an increase of 1.9% over projected baseline revenue, while Trump’s tax changes would lower tax revenue by $9.8 trillion. Clinton’s higher taxes would reduce incomes and revenue somewhat, while Trump’s tax cuts would potentially boost output substantially. Using an extended simulation model, we find that 86% of the incremental tax burden of Clinton’s tax increases would fall on those in the top tenth of the income distribution. Most other taxpayers would see only minor changes in their tax burdens, and the revenue and redistributive effects of her proposed changes are relatively modest. Meanwhile, 70% of Trump’s tax cuts would go to those in the top decile, and the effects are large, with gains of over $15,000 annually per person for this group, compared to gains of less than $500 per person for the poorest 40% of the population. On tax policy, the two candidates propose strikingly different policies.     

Who Benefits from Inconsistent Multinational Tax Transfer‐Pricing Rules?*

This paper uses a strategic tax compliance model to examine taxpayer reporting and tax authority audit strategies in an international setting with two tax authorities. The setting features both information asymmetry between the taxpayer and the tax authorities and inconsistent tax transfer‐pricing rules. The latter creates the possibility of each country trying to tax the same income. We study the effect of the probability of transfer‐price rule inconsistency on the strategies and payoffs of the taxpayer and the tax authorities. We find that an increase in the probability of transfer‐price rule inconsistency induces more aggressive auditing by governments. It therefore deters taxpayers from shifting income to the country with the lower tax rate in situations in which the transfer‐pricing rules are consistent, and can either increase or decrease the income reported to the low‐tax‐rate country in cases in which the transfer‐pricing rules are inconsistent. We find that an increase in transfer‐price rule inconsistency could either increase or decrease the taxpayer's expected tax liability and could either increase or decrease the deadweight loss from auditing. Our results call into question the conventional wisdom that the prospect of double taxation due to transfer‐price rule inconsistency increases a firm's expected tax liability and governments' expected audit costs.     

Tests of a Deferred Tax Explanation of the Negative Association between the LIFO Reserve and Firm Value*

Guenther and Trombley (1994) and Jennings, Simko, and Thompson (1996) document a negative association between a firm's last-in, first-out (LIFO) reserve and the market value of its equity. In this paper, we test a deferred tax explanation of this negative association. Specifically, we argue that investors, conditional on adjusting inventory to as-if first-in, first-out (FIFO), estimate a firm's future LIFO liquidation tax burden as its LIFO reserve multiplied by the appropriate corporate tax rate and include this tax-adjusted LIFO reserve in the valuation of a LIFO firm's net assets. On the basis of this argument, the tax-adjusted LIFO reserve is in effect an estimate of an off-balance-sheet deferred tax liability and, as a result, we predict a negative association between the tax-adjusted LIFO reserve and market value of equity. We test our deferred tax explanation by estimating a valuation model in which a firm's market value of equity is expressed as a function of the firm's assets, liabilities, deferred tax liability, and tax-adjusted LIFO reserve; the model is estimated separately in years preceding and following the reduction of tax rates mandated by the US Tax Reform Act of 1986. Test results provide strong support for the deferred tax explanation of the negative association between a firm's LIFO reserve and the market value of its equity.     

Tax policy implications for a two‐engine growing economy

In an endogenous growth model with two engines of R&D and capital, we investigate the environment of “inclusive growth” for tax reallocations (tax increases or tax credits) to gain broader benefits in terms of promoting the overall GDP growth without an increase in income inequality. Our results show that a tax increase in the capital‐good sector can result in inclusive growth, boosting overall growth and reducing income inequality, provided that the status quo tax rate is not too high. Surprisingly, tax credits are not able to achieve such inclusive growth. While the GDP growth rises, a tax credit in the R&D sector not only increases income inequality but also decreases the aggregate employment, if the labor mobility cost between the final‐good and R&D/capital‐good sectors is relatively low. This provides a caution to policymakers given the fact that research tax credits have served as a common incentive to strengthen the R&D environment.     

关于我国个人所得税制度的思考

我国的个人所得税制度自1980年建立以来,在调节收入分配,缩小贫富差距,增加财政收入方面起到了积极的作用。随着我国经济的快速发展,我国个人所得税制度在税制模式、课税标准、税率、起征点方面日益暴露出其存在的问题。文章认为,建立分类和综合相结合的混合税制,依据物价指数和国家经济形势的发展适时调整费用扣除标准和个税起征点,适当降低边际税率、调整级距是当前个人所得税制度改革需要研究的问题。     

The Impact of Personal Income Tax Structure on Income Inequality for Belgium,Bulgaria, Germany,Lithuania, and Poland: A Comparison of Flat and Graduated Income Tax Structures

The level of income inequality in a country is usually a contentious and politically divisive issue. How the tax structure affects this inequality is of crucial concern to policymakers. In this paper, we examine the income tax experiences of five European Union countries: Belgium, Bulgaria, Germany, Lithuania, and Poland. This paper focuses on the comparison between flat and graduated personal income tax rate structures. Various methods were used to measure the progressivity of income taxes across these countries such as the average tax rate, cumulative shares of income, and the Gini and other indices. The findings show that the graduated rate income tax structure of Germany and Belgium are the most effective at reducing inequality. On the other hand, Lithuania’s proportional income tax structure is much more effective at reducing income inequality when compared to the graduated rate structure of Poland. Also, an appropriately-sized income tax threshold can transform a flat structure to a redistributive one that compares favorably with some graduated rate structures. In the case of Bulgaria, introducing an income tax threshold that is roughly the size of average income would reduce inequality by about 4 %.

     

The effect of China's agricultural tax abolition on rural families' incomes and production

This paper uses the rural household panel data collected by Research Center for Rural Economy to evaluate the impacts of China's agricultural tax abolition during 2004–2005 on farmers' income and production behavior. We find that the abolition of agricultural tax did not significantly affect agricultural production. The effects on input use and productivity are also found statistically insignificant. All these are consistent with the lump-sum property of the tax and imply little effect of the tax abolition on relaxing credit constraints to farmers. Finally, we find that the tax abolition did not increase farmers' net income significantly.