A Wealth Tax on the Rich to Bring Down Public Debt? Revenue and Distributional Effects of a Capital Levy in Germany

The idea of higher wealth taxes to finance the mounting public debt in the wake of the financial crisis is gaining ground in several OECD countries. We evaluate the revenue and distributional effects of a one‐time capital levy on personal net wealth that is currently on the political agenda in Germany. We use survey data from the German Socio‐Economic Panel (SOEP) and estimate the net wealth distribution at the very top, based on publicly‐available information about very rich Germans. Since net wealth is strongly concentrated, the capital levy could raise substantial revenue, even if relatively high personal allowances are granted. We also analyse the compliance and administrative costs of the capital levy.     

The implication of extreme events on policy responses

This paper considers a situation where a real risk exists that requires precautions, but the public mostly experiences the risk through infrequently occurring extreme events; this type of risk includes risk from climate change, international terrorism, natural calamities or financial crises. The analysis shows that if a risk-mitigating policy is based on the perceived riskiness of that risk, it will call for disproportionate responses (compared to what the ‘real’ risk suggests) by either under- or over-investing in risk-reducing policies, depending on the characteristics of the problem, implying significant volatility in the policy response. This type of response provides at least three challenges to society: policy cycles where implementation lags behind the actual change in risk, a lock-in to inefficient technologies and additional costs. Finally, this paper addresses the question of how the above-mentioned challenges can be managed through proper risk communication.     

Die Verfahrensheterogenität in der Performance-Messung von Anlageportfolios

Performance measurement is a fundamental part of the evaluation of an asset portfolio. As traditional performance approaches are under severe criticism and their application is widely discussed especially in case of fat-tailed return distributions, modern performance-measures become widely accepted both in academic and practical use. The modern way of an adequate performance measurement is characterized by the application of asymmetric risk measures, by the release of the basic principles of an equilibrium model or by the deflection from a ratio-based construction. Moreover the current academic discussion regarding the combination of modern performance measures and the mathematical construct of copulas leads to copula-based approaches that unify a shortfall-oriented risk-conception with an adequate modelling of dependence structures between the considered portfolio elements. The present paper discusses the main representatives of traditional, modern and copula-based performance measures and shows their advantages and disadvantages as well as possible fields of research.     

REIT Capital Structure Choices: Preparation Matters

Sun, Titman and Twite find that capital structure risks, namely, high leverage and a high share of short‐term debt, reduced the cumulative total return of U.S. REITs in the 2007–2009 financial crisis. We find that mitigating capital structure risks ahead of the crisis by reducing leverage and extending debt maturity in 2006 was associated with a significantly higher cumulative total return 2007–2009, after controlling for the levels of those variables at the start of the financial crisis. We further identify two systematic cross‐sectional differences between those REITs that reduced capital structure risks prior to the financial crisis and those that did not: the exposure to capital structure risks and the strength of corporate governance. On balance, our findings are consistent with the interpretation of risk‐reducing adjustments to capital structure ahead of the crisis as a component of managerial skill and discipline with significant implications for firm value during the crisis.     

Open issues in happiness research

Happiness research is one of the most vivid and fruitful parts of modern economics. The focus is on empirical findings. In contrast, theoretical work has been rather neglected. The paper deals with three areas needing more analytical work: the choice or imposition of comparison or reference groups; and the extent, speed and symmetry of adaptation to positive and negative shocks on happiness. In both areas, theoretical propositions are derived which can in the future be empirically tested. The third area relates to the political economy of happiness. Many governments intend to take the happiness index as a criterion of how successful their policies are. As a consequence, survey respondents get an incentive to misrepresent their happiness level, and governments to manipulate the aggregate happiness indicator in their favor. A country’s constitution must induce governments to carefully observe human rights, democracy, the decentralization of political decision making, and market institutions and provide people with the possibility to acquire a good education and find a suitable job.     

Unilateral actions, the case of international environmental problems

When abatement costs are uncertain but correlated, and a country becomes privately informed that costs are low, then unilateral actions can serve as a signalling device to reveal low costs and this can have the potential to trigger positive responses abroad. However, the country engaging in unilateral actions is the one with the highest expectation about the other countries’ reactions, and it might suffer from an effect similar to the winner’s curse.     

Income taxes and entrepreneurial choice: empirical evidence from two German natural experiments

Does tax policy affect entrepreneurial choice? We use two tax reforms in Germany as “natural experiments”. These reforms reduced the marginal income tax rate for entrepreneurs with income above a certain threshold, with the exception of freelance professionals. The two conditions for belonging to the treatment group allow us to apply a “difference-in-difference-in-difference” identification strategy to estimate the effects of the tax rate reductions. We base our analysis on the microcensus, the official representative continuous household survey in Germany. The results indicate that the tax rate reductions increased the probability of choosing self-employment.     

Style Drift in Private Equity

Abstract:  We introduce the concept of style drift to private equity investment. We present theory and evidence pertaining to style drifts in terms of a fund manager's stated focus on particular stages of entrepreneurial development. We develop a model that derives conditions under which style drifts are less likely among younger fund managers. We also show ways in which changes in market conditions can affect style drifts, and differences for funds committed to early-stage investments compared to funds committed to late-stage investments. We find some evidence of a positive relation between style drifting and investment performance.