Average Effective Tax Rates Research Articles

Who benefits from the preferential treatment of business property under the German inheritance tax?

This paper contributes to the recent debate on the tax privilege for business property introduced by the German Inheritance Tax Act of 2009. We shed light on the tax effects of the preferential treatment based on micro-level data of realized business transfers from the German Inheritance Tax Statistic. As the tax exemptions are tied to employment expenses of the transferred business, we combine information from the tax statistic with a simulation of future employment expenses. We then compare the effective tax rates under a preferential treatment to the ones under a non-preferential treatment alternative. Results show that a large portion of business successions is untaxed under the current German inheritance tax law and that average effective tax rates approach zero. Moreover, the preferential treatment levels the differences between the effective taxation of small and large transfers and leads to an almost equal effective tax rate across all tax brackets. We also demonstrate that tax reductions are considerably larger in times of economic growth where the requirements for a preferential treatment are more likely to be met.

Efektívna priemerná daňová sadzba z kapitálu aplikovaná na slovenské podmienky

Investors' decisions are not based only on the statutory tax rate in the country, but also on a range of other aspects, such as depreciation of fixed assets, treatment of foreign source income, property taxes paid by firms, as well as treatment of dividends paid by companies and taxes on wealth and capital gains at the level of individuals. These aspects are incorporated into the model created by the Centre for European Economic Research (ZEW). This model provides a comprehensive look at the issue of tax competition, therefore the paper deals with describing and explaining its construction. The benefit is description of the effective average tax rate (EATR) in the Slovak conditions, evaluation of its development and changes by the different types of assets and the ways of financing, as well as forecasting its level based on the change in the corporate income tax rate. The indicator, which represents the level of capital taxation, is complicated to determine. EATR means the significant progress on this issue.

A Tax-Benefit Model for Austria (AUTAX): Work Incentives and Distributional Effects of the 2016 Tax Reform

This study introduces a tax-benefit model based on administrative data for Austria (AUTAX) that can be used for theex ante and ex post evaluation of reforms of personal income taxation and social benefits. We analyze the effects of the 2016 Austrian tax reform ex anteand concentrate on the effects on the distribution of net income and on work incentives. Our results show that the changes to the tax brackets have slightly increased inequality, and the middle- and high-income earners profited most. This effect has been significantly lowered by an increase in the negative income tax for low-income earners. By calculating average effective tax rates (AETRs) as well as marginal effective tax rates (METRs) along the whole income distribution in our model, we discuss changes on work incentives on the extensive but also on the intensive margin. We show that the 2016 tax reform positively affected the work incentives on the extensive and the intensive margin for higher income groups. The additional change in the negative income tax had only an impact on the extensive margin of low-income earners. These low-income earners are usually part-time workers, therefore giving a higher incentive to work part-time but no additional incentive to increase working hours. We show that a decrease in social security contributions instead of an increase in the negative income tax for low-income earners would lead to an increase in both the extensive and the intensive margin.

Why are U.S.-Owned Foreign Subsidiaries Not Tax Aggressive?

This paper empirically tests a theory laid out in Scholes et al. (2015, p. 315) that the U.S. worldwide tax system reduces the incentive of U.S. parent companies to be tax aggressive in their foreign subsidiaries. Investors subject to a worldwide tax system pay taxes on their worldwide income, regardless of the origin thereof. Therefore, a U.S. investor pays the difference between the effective tax payment abroad and the higher U.S. statutory tax when profits are repatriated. In contrast, investors subject to territorial tax systems gain the full tax savings from being tax aggressive abroad. Our results show that U.S.-owned foreign subsidiaries have a by 1.2 percentage point higher average GAAP effective tax rate (ETR) compared to subsidiaries owned by foreign investors from countries with a territorial system. We contribute to the literature by showing a mechanism, other than cross-country profit shifting, why U.S. multinational companies have higher GAAP ETRs than multinationals subject to territorial tax systems.

Effective Tax Rates and Effective Progressivity in a Fiscally Decentralized Country

This paper proposes measures to quantify the effective level and the effective progressivity of taxation in a fiscally decentralized country taking income sorting into account. Using data on the universe of Swiss taxpayers, we find that rich households effectively face significantly lower average and marginal tax rates and lower progressivity than in the benchmark case that does not consider income sorting. This is because high-income households systematically avoid high taxation by locating in low-tax jurisdictions. The results are stronger for singles than for families, indicating that singles are more sensitive to spatial tax differentials than families. Although income tax schedules of the Swiss federation, the 26 cantons and the more than 2,600 municipalities are all strictly progressive, the effectively paid country-wide average tax rate is regressive for households with very high incomes and without children. The proposed measure of the effective average and marginal tax rates also allows us to adequately describe the evolution of the country-wide tax burden over time. We document that about half of the reduction in the tax burden on top incomes between 1975 and 2009 is due to reductions in statutory tax rates and about half to stronger income sorting of the population. Our results also hold when we account for the disutility from housing prices into which tax rates capitalize.

Does Trade Liberalization Trigger Tax Competition? Theory and Evidence from OECD Countries

This article aims at assessing the empirical relevance of New Economic Geography models of tax competition. We rely on a simple model to specify tax reactions functions, which we estimate with a panel covering (up to) 26 OECD countries over the period 1982 to 2006. We provide striking support for the two main predictions regarding the slope and the constant of the reaction function: national governments seem to adjust their corporate tax rate towards the level chosen in countries that are more populated, and they tend to set higher corporate tax rates when their country enjoys a high real market potential. Through the latter effect, trade integration exerts a positive influence on the level of corporate taxation. However, using a theoretically grounded index of bilateral trade integration, we also show that trade liberalization gives rise to significant tax interactions in the setting of effective average tax rates in the case of European countries, thus exerting a downward pressure on corporate tax rates.

TAXATION AND THE USER COST OF CAPITAL

AbstractThis paper provides a review of the concept of user cost and its determinants. Particular attention is given to the influence of taxation. The concept of user cost relates to the rental, the rate of return to capital, that arises in a profit maximizing situation in which further investment in capital produces no additional profit. This paper sets out in some detail the range of assumptions involved in obtaining alternative expressions for the user cost. The user cost refers to a before‐tax capital rental, the rate of return that ensures that the (after‐tax) cost of capital is equal to the post‐tax returns over its life. Hence, associated with the user cost measure is an effective marginal tax rate. This can differ substantially from the statutory marginal rate applicable to the investor. A related effective average tax rate is also defined.

How Much Do U.S. State Governments Really Tax Oil and Gas Extraction?

Growth in oil and gas production in the continental U.S. has led some states to reconsider their taxation of production, prompting comparisons of state policies, especially the rate at which production is taxed. Cross-state comparisons are problematic because states often selectively apply their rates. Using state-level data on oil and gas production and the revenue generated by it, we calculate an effective average tax rate on production. For the 2004-2013 period, we find much variation in effective rates across states, with three states having a rate of 0.1 percent or less and three states having a rate of more than 7.0 percent. The typical state had a 3.6 percent tax rate while the typical dollar of production was taxed at a higher rate, at 4.4 percent. The average state rate increased by about 20 percent from the 2004-2008 period to the 2009-2013 period while taxation of the typical dollar of production saw a smaller increase. On average state tax policy is neutral towards oil versus gas, taxing both at a similar rate.

La Taxation Directe Effective de l’Energie en Belgique. Pourquoi faire simple si on peut faire compliqué pour taxer peu ?

L’article calcule le taux effectif moyen d’imposition sur le revenu des entreprises du secteur de l’énergie en Belgique et le compare avec le taux équivalent dans les autres pays européens. L’article utilise les résultats comptables de 2010 d’un échantillon de 531 entreprises actives en Belgique. Les résultats montrent l’efficacité de l’activisme fiscal en Belgique puisque le taux effectif est parmi les plus bas alors que le taux statutaire est parmi les plus élevés. Ceci a un impact positif sur l’incitation à investir, mais a aussi un coût en termes de recettes fiscales. Par ailleurs, l’activisme fiscal est hautement réversible, comme le montrent les changements adoptés en Belgique depuis 2013.

Corporate Taxation and International Competition

Countries around the world continue to tax corporate income at significant rates despite downward pressures from international competition. Average statutory corporate income tax rates fell from 46 percent in 1982 to 33 percent in 1999, though tax bases simultaneously broadened, as a result of which average corporate tax collections actually rose from 2.1 percent of GDP in 1982 to 2.4 percent of GDP in 1999. Two pieces of evidence point to the possibility that mobile capital has received favorable tax treatment in recent years as a result of tax competition. The first is the experience of American multinational firms, whose average effective foreign tax rates fell from 43 percent in 1982 to 26 percent in 1999. The second is the cross-sectional pattern of tax rate-setting: small countries, facing elastic supplies of world capital, taxed corporate income at significantly lower rates than did larger countries in 1982. Corporate tax rates in 1999 did not substantially differ between small and large countries, implying that large countries set their tax rates in response to the same competitive pressures that small countries have always faced.

Relative effects of labor taxes on employment and working hours: role of mechanisms shaping working hours

High labor income taxes are one of the most important explanations advanced for the large decline of labor supply in Europe over the past 30 years. While in some countries the decline comes evenly from employment and hours per worker, in others it comes mostly from hours per worker, or predominantly from employment. This paper studies why labor taxes have different relative effects on employment and hours per worker. We show that different hour-shaping mechanisms are one of the underlying reasons. In the mechanism when hours per worker are bargained by matched job-worker pairs, a higher labor income tax would reduce both employment and hours per worker. As the worker’s hour-bargaining share is larger, hours per worker are decreased by more and employment is decreased by less. In the mechanism when hours per worker are determined exclusively by the household, this goes to the case when the worker has a one-hundred percent hour bargaining power. In this situation, when the leisure utility is linear in hours, the effect on employment is zero and all negative effects are on hours per worker. At the other extreme, in the mechanism when hours per worker are effectively regulated, a higher labor tax only reduces employment with a zero effect on hours. We calibrate the model and show that the quantitative effects of Europe’s increases in average effective tax rates in the past 30 years are consistent with the theoretical predictions.

Taxing Investments in the Asia-Pacific Region: The Importance of Cross-Border Taxation and Tax Incentives

This paper investigates the taxation of investments in the Asia-Pacific region. Our analysis is based on the methodology of Devereux and Griffith (1999, 2003) for determining effective average tax rates. This approach allows us to account for important national and international tax regulations. Our results show that the overall dispersion of effective tax burdens in Asia-Pacific ranges from 10.6% in Hong Kong to 40.4% in India for domestic investments (overall average of 23.4%). In 8 out of 19 jurisdictions covered, investments are, however, effectively taxed at a rate between 20% and 25%. If the investment is made by a foreign investor, cross-border taxation has a significant impact on the overall tax burden. In any of the Asia-Pacific jurisdictions, foreign direct investments by a Singaporean or a German parent company are on average taxed at 29.2% and at 32.8% in case of a US investor. Meanwhile, tax incentives for the stimulation of private investment reduce the effective average tax rate by 8.6 percentage points on average. Fiscal incentives targeted at investments in the high technology sector or the development of specific geographic areas result in the lowest effective tax burdens.

Effective Tax Rates Under IP Tax Planning

Tax planning with intangibles has become one of the most popular and most vividly debated topics in international taxation. We incorporate various intellectual property (IP) tax planning models into forward-looking measures of effective tax rates, namely the disposal of intangibles to low-tax subsidiaries, intra-group licensing arrangements, and intra-group contract R&D. In doing so, we draw upon the methodology put forward by Devereux and Griffith and amend this model by considering a research & development (R&D) investment which is carried out by a parent company, whereby the resulting intangible is exploited by a foreign subsidiary. We point out analytically under which conditions IP tax planning achieves the objective of reducing the effective average tax rate of the group. We find that the disposal of intangibles to low-tax subsidiaries does not achieve this tax planning objective, if the true value of the asset is subject to tax upon the disposal. We show to what extent the parent must understate the value of the intangible in order to reduce the group’s tax burden. We furthermore point out that contract R&D may generally achieve a significant lower effective tax burden. We present cost of capital and effect average tax rates to illustrate these findings.

A Tale of Two Banking Systems: The Performance of U.S. and European Banks in the 21st Century

I compare the financial performance, growth, asset mix, risk, operational efficiency, profitability and capital holdings of the 20 largest commercial banks in the U.S. and Europe from 2001-2013. U.S. banks earned significantly larger stock returns than their European counterparts in the post-crisis years, accompanied by higher rates of revenue and loan growth, lower risk, and superior profitability and loan quality. European banks, on the other hand, remain trapped in a downward spiral of negative revenue and loan growth, decreasing profitability, increasing impaired and nonperforming loans, and are sporting market value to debt ratios that suggest imminent insolvency. U.S. banks display their own post-crisis irregularities financially and operationally, however, including unusually low loan loss allowances relative to their impaired loans, paying smaller dividends to investors and lower interest to depositors compared with Eurozone banks, and a full 5% decline in their average effective tax rate compared with the pre-crisis period. U.S. banks appear to be just as well-capitalized and hold lower levels of investment and trading assets than European banks, but regulatory loopholes that allow U.S. banks to account for trillions of dollars of risky derivatives positions off-balance sheet render these comparisons less than fully meaningful. Despite unprecedented central bank intervention, the stock returns of both U.S. and European banks have remained significantly related to market and bank-level fundamentals in the years since the financial crisis. Modeling bank returns as a function of their profitability, growth and solvency explains 44% to 60% of the variation in U.S. and European bank stock prices, respectively.

How Do Employment Tax Credits Work? - an Analysis of the German Inheritance Tax -

This paper contributes to the recent debate on the tax privilege for business property introduced by the German Inheritance Tax Act of 2009. We shed light on the tax effects of the preferential treatment based on micro-level data of realized business transfers from the German Inheritance Tax Statistic. As the tax exemptions are tied to employment expenses of the transferred business, we combine information from the tax statistic with a simulation of future employment expenses. We then compare the effective tax rates under a preferential treatment to the ones under a non-preferential treatment alternative. Results show that a large portion of business successions is untaxed under the current German inheritance tax law and that average effective tax rates approach zero. Moreover, the preferential treatment levels the differences between the effective taxation of small and large transfers and leads to an almost equal effective tax rate across all tax brackets. We also demonstrate that tax reductions are considerably larger in times of economic growth where the requirements for a preferential treatment are more likely to be met.

Bank Fundamentals, Executive Compensation and Public Perception of Banks in Australia

Public perception of banks in Australia is relatively poor compared to firms in other major services sectors. This study explores a number of potential sources of negative public opinion. We find that bank profits are similar to firms in other sectors after adjustment for firm size. Average bank executive remuneration as a proportion of total staff costs are also lower than those in other sectors. Finally, Australian banks not only pay a higher average effective tax rate than their counterparts in OECD countries but are also closest to their statutory corporate tax rates. Our findings therefore suggest that poor public perception of banks is based on the flawed claims of generating excessive profits, overpaying bank executives, and underpaying taxes and is not justified.

Intellectual property box regimes: effective tax rates and tax policy considerations

In 2014, 12 European countries are operating Intellectual Property (IP) Box regimes that provide substantially reduced rates of corporate tax for income derived from important forms of intellectual property. We describe the key features of the policies and incorporate them into forward-looking measures of the cost of capital and the effective average tax rate. We show that the treatment of expenses relating to IP income is particularly important in determining the effective tax burden. A key finding is that regimes that allow expenses to be deducted at the ordinary corporate income tax rate, as opposed to the lower IP Box tax rate, may result in negative effective average tax rates and can thereby provide a subsidy to unprofitable projects. We discuss the ways in which IP Boxes are likely to affect firms’ decisions and relate this to possible policy aims. While some regimes attempt to link the tax benefit to real activities, others have designed a policy targeted at the income streams associated with intellectual property. A key concern is the role that IP Boxes may play in increased tax competition between European countries.

A Tale of Two Cities: Learning from Oregonns Idiosyncratic System of Property Tax Administration

We describe the evolution of Oregon’s one-off property tax system, which emphasizes stable growth in tax payments and inter-jurisdictional uniformity in tax rates. We contrast its outcomes in two sections of Portland, which had the best, most fairly administered property tax system in the state under the old regime, – the more affluent neighborhoods on the west side of the Willamette River and the relatively poorer ones on the east side (the two cities of our title). We find assessment quality to be slowly, but steadily deteriorating under the current regime and the gap between the sections of the city gradually widening. Consequently, we find that taxes are more highly correlated with market values on the west side, where homes also face higher average effective-tax rates, than on the east. Overall, however, inter-jurisdictional tax burdens undoubtedly and intra-jurisdictional burdens, even in Portland, probably still correlate better with property values than under the old tax system.

Examining which Benchmarks Investors Use to Evaluate Tax Expense

We propose that investors rely on tax rate heuristics to reduce information processing costs associated with understanding complex income tax information and examine which rate investors use to impound income taxes into firm value. We find that the top U.S. statutory rate is more associated with firm value than the firm’s prior year effective tax rate (ETR), prior three-year average ETR or prior-year industry-average ETR. However, we find that investors rely less on the statutory tax rate when the benefits (costs) of doing so are higher (lower). Specifically, when firms have more opportunities for long-term tax savings or when information processing costs are lower investors rely less on the statutory tax rate. Our findings have implications for management in communicating tax information to investors and for standard setters in understanding which tax information investors use.

The Taxation of Foreign Passive Income for Groups of Companies in Korea

Korean tax law has neither typical GAAR nor specific anti-avoidance provisions particularly targeting only foreign passive income even though it has some special anti-avoidance measures such as transfer pricing rules, thin capitalization rules, the CFC rules. However, Korean tax authorities has extensively applied the substance-over-form principle (provided in tax laws) against cross-border tax avoidance schemes, especially treaty shopping attempts which often involve foreign passive income such as dividends, interest and royalties. Korea introduced the CFC rules in 1996 to control the outflow of capital overseas, specifically targeting the moving of money in the underground economy to tax havens. The Korean CFC rules principally rely on the jurisdictional approach but apply the transactional approach in exceptional cases. These rules apply to Korean residents, both corporations and individuals that have invested in a company incorporated in a foreign jurisdiction with an average effective tax rate of 15% or less on actually accrued income for the past three years. Where a CFC has retained earnings, it is deemed that dividends are distributed to the resident shareholder at the end of each fiscal year of the CFC. The deemed dividends are included in the shareholder’s profits or dividend income for the taxable year on which the sixtieth day after the end of the particular fiscal year of the CFC falls. However if the CFC is actively engaged in a business operation through an office, shop or factory, it is not subject to the CFC rules in principle. If the CFC actually distributes dividends from the relevant retained earnings, such amount is not taxable so that such dividends will not be taxed twice. Foreign tax credit is allowed when actual dividends are paid from the CFC and indirect foreign tax credit is also available when the distributable regained earnings are attributed to residents. The accumulated amount of the deemed dividends minus the actual dividends by the time when the shares are sold is not taxable if the shares are disposed by a domestic corporation, or is not characterized as capital gains from the disposition of the shares. Although a resident corporation has to recognize deemed dividend income, it cannot reflect the business losses of its CFC. There is no particular mechanism in Korean CFC rules to cure possible double taxation caused by simultaneous application of respective country’s own CFC rules on the same CFC.