Asymmetric Tax Research Articles

Tax Loss Carryforwards and Firm Investments

ABSTRACT The asymmetric tax treatment of gains versus losses can lead to the creation of a tax loss carryforward (TLCF) in case of prior-period losses. TLCFs shield future income from taxation and can therefore be relevant for investment decisions. The relevance of this tax shield is underlined by the substantial amounts of TLCFs carried forward by U.S. corporations. Despite the theoretically expected positive relation, empirical research on TLCFs and firm-level investments is scarce. We first investigate the TLCF investment relation using simulation analyses and differentiate capital expenditure from R&D expenditure. Our empirical results confirm the positive TLCF investment relation, especially when firms have sufficient financial resources and investment opportunities. Also, the TLCF incentive works differently for capital expenditures compared with R&D. Additional simulation results illustrate how the recent legal changes in carryforward and backward rules affect the investment-enhancing effect of TLCFs and show that it is expected to remain qualitatively comparable. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: H25; H32; M41.

Asymmetric Double Tax Treaties: Relief Method and Tax Sparing for Foreign Direct Investment in Developing Countries

This paper focuses on asymmetric tax treaties and investigates from an empirical perspective the impact of OECD member states’ double tax relief method and of treaty tax-sparing provisions on investments in developing countries, while considering network effects. Our results suggest that having a treaty between the OECD member state and the developing country, which improves the investor's conditions in terms of tax burden, by changing the unilateral tax relief method, increases FDI to the developing country. The positive effect prevails when investigated within investments made through the direct route from residence to source. Results suggest that OECD member states offer tax-sparing provisions mostly to less-developed economies, which already receive very low FDI. Finally, we extend the investigation to an analysis of the impact of residence countries’ tax relief methods on source countries’ domestic tax policy. Our results suggest that developing countries set higher CIT rates when the OECD member state relieves double taxation through the exemption method, as compared to when it offers a foreign tax credit.

Tax competition with asymmetric endowments in fossil resources

This paper contributes to the theoretical understanding of strategic interactions of governments on global markets for fossil resources and for capital. We analyze carbon taxes and subsidies and their impact on national welfare in a two country model with markets for capital and fossil resources, and asymmetric resource endowments. Resource poor countries have an incentive to tax the use of fossil fuels to appropriate the resource rent. Resource rich countries subsidize fossil fuel use to attract production factors in order to increase national income. We have two main results. First, we demonstrate that capital mobility has a taming effect on the incentives to tax and to subsidize resources. When taxing resources not only affects the international resource market, but also the international capital market, taxation is more distortionary and is thus more costly to governments. Second, while early studies of asymmetric tax competition found that small countries in terms of population are winners of tax competition, we show that with asymmetric resource endowments but a symmetric population size, there are no winners. Then, the Nash equilibrium of carbon tax competition is the least desirable outcome in terms of social welfare. A game structure similar to a Prisoner’s Dilemma emerges and cooperation makes Pareto improvements over the Nash equilibrium possible.

Asymmetric corporate tax compliance: Evidence from a tax reform in China

Using China's 2008 corporate tax reform as a quasi-natural experiment, we construct a difference-in-differences setting to study firms' asymmetric tax compliance. Compared to firms whose taxes were unaffected by the reform, firms whose tax rate increased reported significantly lower profit margins to avoid paying more taxes. However, firms facing a tax cut did not behave differently from the unaffected firms. The asymmetric behavior is valid for private firms, but not for state-owned firms that have softer budget constraints. Such tax avoidance is done through the manipulation of the costs of goods sold and other expenses, rather than managing net receivables.

The Analogous Application of State Aid Law to Asymmetric Taxes

The Analogous Application of State Aid Law to Asymmetric Taxes

Are Determinants of Government Expenditure Symmetry or Asymmetry? Fresh Evidence from Nigeria

Nigeria government has been playing the role of internalizing economic externalities, dealing with issue of unemployment and overall welfare of the populace. However, in the presence of huge and rising government expenditure, unemployment, and inflation rate still persist. This therefore called for a revisit of what determines government expenditure. There are three issues yet unresolved in the debate of what drives government expenditure. These are omitted variables bias, aggregation bias and asymmetry issue. To deal with aggregation bias, we focus on the components of government expenditure, that is, capital and recurrent. To address the issue of asymmetry, nonlinear autoregressive distributed lag was employed. Data are obtained for relevant variables spanning 1981–2021. Model of government expenditure developed by Peacock and Wiseman (1961) combined with Devarajan et al (1996) and Giavazzi, et al (2000) models are utilized. The following results are obtained. First, government capital expenditure is countercyclical while recurrent expenditure is procyclical. Second, some drivers of government expenditure, such as exchange rate and oil price, exhibit asymmetry behavior. Asymmetric tax revenue shows potential to drive capital expenditure but significantly and positively influences recurrent expenditure. Asymmetric behavior of oil revenue and exchange rate also engenders capital expenditure. However, asymmetric behavior of degree of openness and inflation rate negatively affects capital expenditure. Asymmetric behavior of tax revenue and oil revenue posted positive effect while exchange rate and degree of openness have negative effect on recurrent expenditure. Period of election is also a strong positive determinant of recurrent expenditure both in the short and long run. Following the nature of cyclicality of the component of government expenditure, the priority of government could be on capital expenditure since it will provide essential public goods required for the economy to flourish. Bearing in mind that oil revenue is volatile, it is imperative for government to rely more on tax revenue than oil revenue. Engaging in forward exchange rate might be appropriate to deal with any possible exchange rate fluctuation.

Heterogeneous capital tax competition in a federation with asymmetric tax compliance

Abstract In a federal country with two regions, consumers can decide not only the region where to invest, but also the type of capital investment. We analyse how such decision is affected by the fact that a first type of capital is taxed at a regional level while a second one is taxed at a federal level with tax compliance for federal taxation varying across regions. A standard horizontal tax competition arises for the first type of capital across regions. Instead, vertical tax competition arising between the regional and the federal level is not standard because there is not tax base overlap between the two tiers of government. However, both regional and federal tax bases are affected by tax policies decided by each level of government via capital movements from one type of capital towards the other one. Our main result shows under which conditions an increase in federal taxation in response to an increase in tax noncompliance may be less severe than in a set-up with only one type of capital because of capital flights arising not only across regions, but also across different types of capital investment.

Financing corporate tax cuts with shareholder taxes

We study the aggregate and distributional consequences of replacing corporate profit taxes with shareholder taxes, namely taxes on dividends and capital gains, in a setting with incomplete markets and heterogeneity at both the household and the firm level. The reform yields distributional gains with a large majority of households benefiting. Moreover, if dividend and capital gains are taxed at the same rate, the reform is also efficiency‐enhancing and the implied optimal corporate income tax rate is zero. In contrast, an asymmetric tax treatment of dividend and capital gains induces a trade‐off between efficiency and distributional concerns that is optimally resolved at a positive optimal corporate tax rate, implying double taxation.

Tax competition and political agency problems

AbstractWe study how politicians' reputation concerns affect taxation in the presence of intergovernmental competition. To this end, we construct a two‐country asymmetric tax competition model in which the residents in one of the two countries face a domestic political agency problem: the residents do not know whether the incumbent politician is benevolent or leviathan. To separate themselves from leviathan politicians and attract voters’ support, benevolent politicians argue for excessively low taxation, which can be regarded as anti‐taxation populism. This anti‐taxation populism exhibits the following two properties. First, the populist country's low production technology relative to the other country facilitates the emergence of anti‐taxation populism. Second, anti‐taxation populism can improve welfare in terms of either the populist country or the whole world, depending on the asymmetry of the production technology.

Asymmetric taxation, limited liability, and agency conflicts

Current income tax systems are characterized by an asymmetric treatment of gains and losses. This implies that the (effective) tax rate on profits exceeds that on losses. We study the contractural relationship between two parties (the principal and the agent). For example, such a relationship occurs if a franchisee (agent) contracts with a franchiser (principal) or when a new partner (agent) enters a partnership (principal). We focus on the effect of the agent's asymmetric taxation on the principal's optimal contract and show that the principal's expected profit is a non-monotonous function of the agent's loss tax rate. In particular, we show that the principal can be strictly better off if the agent is taxed more heavily. This result stands in contrast to the existing literature, which has only shown that lower taxation at the agent's level increases the principal's expected profit.

Industry and financial market concentration

This paper elaborates upon the correlation of the Lerner indexes in industry and financial market. It is found that the concentration in this market encourages the entry of firms in the non-financial sector, ceteris paribus. Since, concentration in industry affects concentration in banking too, because firm efficiency influences leverage decisions, an ad-hoc model of the dynamic interaction of the two indexes shows that the optimal market structures in both industry and banking are between perfect competition and monopoly. The use of after tax data in assessing the Lerner indexes empirically, can distort conclusions because the index responds positively to a tax rate change, and asymmetric tax changes can distort the relationship between industry and financial market concentration. Monetary and competition policies can influence concentration in the desired direction if any, but decision-making has to assess first if domestic industry concentration is desirable on grounds of global competition.

Technology trade with asymmetric tax regimes and heterogeneous labour markets: Implications for macro quantities and asset prices

AbstractThe international diffusion of technology plays a key role in stimulating global growth and explaining co‐movements of international equity returns. Existing empirical evidence suggests that countries are heterogeneous in their attitude towards innovation: Some countries rely more on technology adoption while other countries rely more on internal technology production. European countries that rely more on adoption are also typically characterized by lower fiscal policy flexibility and higher labour market rigidity. We develop a two‐country model, in which both countries rely on R&D and adoption, to study the short‐ and long‐run effects of aggregate technology and adoption probability shocks on economic growth in the presence of the aforementioned asymmetries. Our framework suggests that an increase in the ability to adopt technology from abroad stimulates future economic growth in the country that benefits from higher adoption rates but the beneficial effects also spread to the foreign country. Moreover, heterogeneity helps to explain the differences in macro quantities and equity returns observed in the international data.

Endogenous capital supply and equilibrium leadership in tax competition

In this paper, we reconsider the leadership of tax competition, focusing on a situation where total amount of capital competed by countries is endogenously determined. Specifically, we model a timing game under asymmetric tax competition, in which capital is supplied not only by the residents of two countries, but also by investors outside these countries. The results show that, when the capital market becomes more accessible for outside investors, sequential-move equilibria are more likely to be realized, in which one country leads and the other follows. Conversely, only a simultaneous-move equilibrium emerges when the openness of the market is sufficiently small. These results are reversed when governments compete in public investment rather than tax.

Tax competition between developed, emerging, and developing countries – Same same but different?

This paper analyzes tax competition between countries, which differ in their country-specific risks. We show that the outcome of asymmetric tax competition crucially depends on the ability of multinational firms to shift profits. With high costs of profit shifting, higher-risk countries set lower tax rates than lower-risk countries whereas the opposite is true if the costs of profit shifting are low. The results provide an explanation for the patterns observed in the corporate income tax policies across countries differing in their level of development. Moreover, for intermediate costs of profit shifting, we show that countries' absolute risk level plays an important role in tax rate setting. These results carry important implication for the empirical tax competition literature.

Tax Competition between Developed, Emerging, and Developing Countries - Same Same but Different?

This paper analyzes tax competition between countries, which differ in their country-specific risks. We show that the outcome of asymmetric tax competition crucially depends on the ability of multinational firms to shift profits. With high costs of profit shifting, higher-risk countries set lower tax rates than lower-risk countries whereas the opposite is true if the costs of profit shifting are low. The results provide an explanation for the patterns observed in the corporate income tax policies across countries differing in their level of development. Moreover, for intermediate costs of profit shifting, we show that countries’ absolute risk level plays an important role in tax rate setting. These results carry important implication for the empirical tax competition literature.

Tax Competition With Asymmetric Endowments in Fossil Resources

This paper contributes to the theoretical understanding of strategic interactions of governments on global factor markets. We analyze carbon taxes and subsidies and their impact on national welfare in a two country model with markets for capital and fossil resources, and asymmetric resource en- dowments. We have four contributions. First, we show that resource poor countries have an incentive to tax the use of fossil fuels to appropriate the resource rent. Resource rich countries subsidize fossil fuel use to attract production factors in order to increase national income. Second, we demonstrate that capital mobility has a taming effect on the incentives to tax and to subsidize resources. When taxing resources not only affects the international resource market, but also the international capital market, taxation is more distortionary and is thus more costly to governments. Third, while early studies of asymmetric tax competition found that small countries in terms of population are winners of tax competition, we show that with asymmetric resource endowments but a symmetric population size, there are no winners. Then, the Nash equilibrium of carbon tax competition is the least desirable outcome in terms of social welfare. A game structure similar to a Prisoner’s Dilemma emerges and cooperation makes Pareto improvements over the Nash equilibrium possible. Fourth, we explore the distinction of strategic policy interaction in tax competition and tariff war.

Heads I win, tails you lose: Asymmetric taxes, risk taking, and innovation

When multinationals face lower tax rates abroad than in the US, transfer pricing strategies generate an asymmetry in the tax rates on a project’s profits and losses. We show that the tax savings from transfer pricing can be expressed as a long position in a call option. We use a model to show that this transfer pricing call option leads a firm to choose riskier and larger projects than it would otherwise. Thus, transfer pricing strategies do not simply reduce a firm’s taxes, they can influence the scale and types of projects undertaken.

Framing and salience effects in tax evasion decisions – An experiment on underreporting and overdeducting

Using different controlled and incentivized experiments, we analyze whether taxpayers are more willing to evade taxes by underreporting positive income (e.g., business or nonbusiness income) than by overdeducting negative income (e.g., deductions, credits, or losses). We robustly observe an asymmetric tax evasion behavior. Specifically, individuals are less compliant in case of positive income. This result is robust to a variation in which the after-tax payoffs from the cases with positive and negative income are offset against each other – even though offsetting reduces the asymmetric effect significantly. In an experimental environment in which the interaction of positive and negative income reporting is made very saliently and in which we consequently expect that subjects decide on both tax evasion decisions jointly, the asymmetric effect vanishes. We therefore provide evidence that (1) tax evasion behavior is asymmetrically in case of positive and negative income reporting, (2) offsetting reduces this asymmetric effect and (3) the salience of income interaction plays an important role in tax evasion decisions.

Comment on “Heads I win, tails you lose: Asymmetric taxes, risk taking, and innovation” by James F. Albertus, Brent Glover and Oliver Levine

Comment on “Heads I win, tails you lose: Asymmetric taxes, risk taking, and innovation” by James F. Albertus, Brent Glover and Oliver Levine

Equilibrium Leadership in Tax Competition for Endogenous Capital Supply

The role of endogenized leadership has been analyzed in detail in the tax competition literature. However, not many studies in the literature take capital inflow from outside of the countries under tax competition into consideration. To fill this gap, in this paper, we reconsider the endogenized leadership of tax competition by focusing on the role of it. For the purpose, we model a timing game under asymmetric tax competition, where the capital competed among two countries is supplied not only by the residents of the two countries but also exogenously, depending on the rate of return to capital on the integrated market. Due to the exogenous capital inflows, sequential-move equilibria can be realized, in which one country leads and the other follows.