On the optimal progressivity of the income tax code

This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions.Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible.     

Optimal factor and commodity taxation in a small open economy

A two-sector trade model with specific factors and perfect international capital mobility is used to analyze the optimal mix of factor and commodity taxation in a small open economy that faces domestic or international constraints on its tax instruments. In the unconstrained benchmark case, the small country will tax specific factors and domestic consumption but chooses zero tax rates for a selective production tax (i.e., an origin-based commodity tax) and a source-based tax on capital income. When commodity taxation must follow a combination of origin and destination principles, then this mixed commodity tax rate will be positive and its production effects are partly compensated in the optimum by a capital subsidy. These international restrictions interact with domestic constraints when rents accruing to fixed factors cannot be taxed by a separate instrument, and a positive tax rate on capital serves as an indirect way of rent taxation.     

Corporate Tax Holidays and Investment

Governments of developing countries commonly adopt tax holidaysto encourage investment. This article evaluates the incentivesprovided by company income tax holidays and explains the importanceof the timing of depreciation allowances in determining theeffective tax rates and the cost of capital to firms consideringadditional investment during the holiday. If an asset is long-livedand depreciation allowances for tax purposes are accelerated,the tax holiday, by preventing depreciation deductions duringperiods of peak profits, may actually penalize a company forinvesting during the holiday. The closer the investment to theend of the holiday period, the more severe the penalty. If,instead, depreciation allowances may be deferred until afterthe holiday, this program of incentives is quite generous tothe firm. How these sharply contrasting results may emerge isillustrated through estimation of effective tax rates and usercosts of capital under tax holiday systems in Bangladesh, Côted'lvoire, Malaysia, Morocco, and Thailand.     

Economic vs. accounting depreciation

In this paper we present and estimate a model of economic depreciation consistent with producer's optimization. The estimated economic depreciation, which is a function of the rate of utilization and level of maintenance, is about half of that used according to tax (accounting) depreciation. The difference between the economic and tax rates of depreciation results in a subsidy and earlier capital replacement. The implicit maximum net tax subsidy expressed as a proportion of the acquisition price of the asset is 13.3% for a sample of Canadian trucking firms.     

Optimal fiscal policy under multiple equilibria

We study optimal fiscal policy in an economy where (i) search frictions create a coordination problem and generate multiple, Pareto-ranked equilibria and (ii) the government finances the provision of a public good by taxing market activity. The government must choose the tax rate before it knows which equilibrium will obtain, and therefore an important part of the problem is determining how the policy will affect the equilibrium selection process. We show that when the equilibrium selection rule is based on the concept of risk dominance, higher tax rates make coordination on the Pareto-superior outcome less likely. As a result, taking equilibrium-selection effects into account leads to a lower optimal tax rate.     

税收优惠方式对研发投入激励效应研究

以我国2014 ～2020年A股上市公司为样本,利用手工搜集整理的独特数据,获取了上市公司实际享受的税率优惠、加计扣除、加速折旧摊销的金额,并以此为基础检验不同税收优惠方式对企业研发投入的激励效应.实证结果表明,税率优惠、加计扣除、加速折旧摊销这三种税收优惠方式都能激励企业加大研发投入,三种税收优惠方式对研发投入的激励...     

Measuring the Effective Tax Burden in the Real World*

This paper argues that forward‐looking indices of the effective tax burden on income from capital – namely, effective marginal and average tax rates – are negatively biased because traditional models overlook dividend constraints associated with financial tax incentives, such as accelerated depreciation. The paper presents measures of the two indices adjusted to remove the bias and compares the new indices with the traditional ones. Numerical simulations carried out to quantify the magnitude of the bias for France, Germany, Ireland, Italy and the UK give evidence of sizeable distortions in the unadjusted indices and, in turn, suggest significant mismeasurement in the current assessment of the effective tax burden.     

A quantitative analysis of inflation as a tax on the underground economy

Inflation rates are more dispersed and are persistently higher in developing countries. This paper quantifies the importance of the public-finance motive for inflation in the presence of a tax-evading sector, the underground economy. The approach is motivated by the observation that the underground economy is especially large in poor countries. The analysis builds on a general equilibrium monetary model with two production sectors, where income in one of the sectors cannot be taxed. A benevolent government finances its budget using an optimal combination of the income tax rate and the inflation rate. The model is first calibrated to the U.S. economy and is then used for a cross-country simulation. The resulting relationships between the size of an underground economy, inflation rate, income tax rate and the share of seigniorage in the government revenue rationalize the cross-country data quantitatively well.     

Optimal tax-timing and asset allocation when tax rebates on capital losses are limited

This article studies the portfolio problem with realization-based capital gain taxation when limited amounts of losses qualify for tax rebate payments, as is the case under current US tax law. When the tax rate applicable to realized losses exceeds that on realized capital gains, it can be optimal to realize capital gains immediately and pay capital gain taxes to regain the option to use potential future losses against a higher tax rate. This incentive adds an entirely new and as yet unstudied dimension to the portfolio problem. It causes risk averse investors to hold more equity and attain higher welfare levels than is the case when trading under a tax system that seeks to collect the same amount of taxes, but does not allow for tax rebate payments. This is because the benefit to these investors from having their losses subsidized is greater than the suffering from having profits taxed at a higher rate.     

On the irrelevance of government debt when taxes are distortionary

We consider a government that can only raise funds by levying distortionary taxes. We allow the government to collect taxes in a given period that are based on incomes earned in previous periods. We show that once we do so, given any debt path, the government can adjust its tax policy so as to attain that debt path without affecting equilibrium allocations or prices.     

The Effective Tax Burden of Companies and of Highly Skilled Manpower: Tax Policy Strategies in a Globalised Economy*

Company taxes and taxes on highly skilled labour both influence the attractiveness of a particular region as a location for investment. We measure the effective tax burden on capital investment and on highly qualified labour in 33 locations across Europe and the United States. We then correlate both types of tax burden in order to study the different tax policy strategies applied in different countries. We find that effective tax rates on companies and on highly skilled employees are closely correlated for a number of countries. Ireland and most new EU Member States impose relatively lower taxes on capital investment than on highly skilled manpower. Conversely, in the US, companies are taxed heavily but the effective tax rate on highly skilled employees is moderate.     

Taxes and the global allocation of capital

Despite enormous growth in international capital flows, capital-output ratios continue to exhibit substantial heterogeneity across countries. We explore the possibility that taxes, particularly corporate taxes, are a significant source of this heterogeneity. The evidence is mixed. Tax rates computed from tax revenue are inversely correlated with capital-output ratios, as we might expect. However, effective tax rates constructed from official tax rates show little relation to capital—or to revenue-based tax measures. The stark difference between these two tax measures remains an open issue.     

Optimal tax depreciation

Currently, solutions to the choice of depreciation methods for tax purposes are obtained through numerical simulation. This paper presents a simple capital budgeting technique which, in conjunction with Descartes' rule of signs, analytically derives the optimal regular depreciation method under the existing U.S. tax code. This technique is then used to determine the optimal depreciable life for short-lived assets and, finally, the analysis is extented to cover the choice of depreciation methods under the Class Life Asset Depreciation Range System.     

Corporate tax,capital structure,and the accessibility of bank loans: Evidence from China

In this paper, we investigate whether listed firms in China adjust their capital structure in response to an increase in the corporate tax rate. Although theories of capital structure suggest that corporate tax is an important determinant of capital structure, how exogenous changes of the tax rate affect firms’ leverage decisions has not been fully explored. We examine a unique circumstance in which the Chinese government increased the corporate tax rate of firms that had previously received local government tax rebates. The evidence indicates that these firms increased their leverage when the corporate tax rate increased. Further investigation suggests that the adjustment of leverage was mostly driven by firms with a high level of access to bank loans.     

Depreciation-Related Capital Gains,Differential Tax Rates,and the Market Value of Real Estate Investment Trusts

We develop a model for valuing U.S. real estate investment trusts (REITs) that considers the tax liability impounded in REITs’ property portfolios. This liability is a function of the portfolio’s accumulated depreciation and is driven by different tax rates applied to individual components of the total gain from property sales. These two components are the capital gain resulting from the sale of property at a price higher than its cost and the gain due to the recapture of depreciation taken during the use of the property. Our measure of value is the REIT’s net asset liquidation value (NALV). The metric of REIT value currently used by analysts is a REIT’s net asset value (NAV), but a REIT’s NAV will always be greater than the NALV and therefore overestimate market value, all else equal. Finally, using observed market prices for REITs, we provide evidence that NALVs give superior estimates of REIT market prices than do NAVs.     

Effects of corporate tax reform on optimum debt maturity

This study investigates effects of selecting maturity years on investment decisions. Ceteris paribus an optimum debt maturity (ODM) maximising net present value exists and its change correlates positively with corporate tax rates but negatively with real interest rates, while its relationship with inflation rate is conditional. Furthermore depreciation does not matter at all. A model simulation carried out for seven selected EU countries demonstrates the most significant role of real interest rate for determining ODM in the period of 1981–2004. Yet corporate tax rate will gain in importance since interest and inflation rates are more rapidly converging in the EMU.     

Income Shifting in the Spanish Dual Income Tax*

Based on a model of behavioural response to taxes, and using the Taxpayers Panel from the Instituto de Estudios Fiscales for the period 1999–2009, we analyse whether the dual nature of the Spanish personal income tax (PIT), reinforced by the 2007 reform, has influenced taxpayers’ behaviour, causing them to convert part of their ‘general income’ (from labour, real estate or economic activities) into ‘savings income’ (from movable capital or capital gains). We also extend the analysis of income shifting and study whether Spanish taxpayers also responded to the different tax treatments given to the two types of savings income (from movable capital and capital gains) until 2007, transforming savings income from one type to the other. The results of our study demonstrate three facts. First, Spanish taxpayers did respond to the different tax rates, shifting income from the general base to different forms of savings, especially capital gains. The highest‐income individuals and the self‐employed and business owners are the groups where this behaviour was most marked. Second, the self‐employed and business owners also turned income from movable assets into capital gains, guided by their different tax rates. And third, we find signs of ‘anticipation’ and ‘learning’ effects caused by the 2007 tax reform. We believe that the results obtained will enrich the growing literature on income shifting.     

Income Taxation and Finite Horizons in a Human Capital Model

We address the issue ofcapital vs. labor income taxation in an overlapping generationsmodel with a positive externality in the human capital production.We compare the performance of the economy in the steady stateunder different tax policies. Three results are obtained. First,the size of the tax revenue required strongly affects the optimal(welfare maximizing) capital-labor income tax portfolio. Inparticular, a zero physical capital income tax rate need notbe optimal. Second, the way in which the finite life cycle issplit between the working and the retirement period also matters.And third, the size of the externality in the human capital productionalso affects the optimal income tax rate mix.     

The future of social security

We analyze the effect of the projected demographic transition on the political support for social security, and equilibrium outcomes. Embedding a probabilistic-voting setup of electoral competition in the standard OLG model with capital accumulation, we find that intergenerational transfers arise in the absence of altruism, commitment, or trigger strategies. Closed-form solutions predict population ageing to lead to higher social security tax rates, a rising share of pensions in GDP, but eventually lower social security benefits per retiree. The response of equilibrium tax rates to demographic shocks reduces old-age consumption risk. Calibrated to match features of the U.S. economy, the model suggests that, in response to the projected demographic transition, social security tax rates will gradually increase to 16%. Other policies that distort labor supply will become less important; labor supply therefore will rise, in contrast with frequently voiced fears.     

Slowing Fossil Fuel Extraction: A Role for Taxation of Exports,Capital Gains and Interest Income

This paper develops a model of a growing open economy rich in non‐renewable resources, the extraction of which negatively impacts domestic productivity and whose sector competes with final production for capital. We analyse how tax rates on capital gains and interest income and the time trend of an export revenue tax rate could slow the extraction of resources for export. We find that taxing capital gains and interest income at the same rate and setting an export revenue tax rate to decline at the marginal social cost of extraction would defer extraction. An export revenue tax rate need not fall over time to curb depletion if capital gains are taxed at a lower rate than interest income, which is second best to taxing asset returns at the same rate when the resources sector competes for capital.