Capital Tax Rate Research Articles

Exploring the Impact of Taxation on Immigration

Rules governing admission of immigrants to stable, developed countries vary widely among countries, yet wealthy immigrants with capital to invest and highly educated immigrants receive favorable admission decisions from immigration authorities more frequently and quickly than do conflict and economic refugees who will become part of a substantially fungible labor force. As preferred immigration destination countries limit the number of immigrants they will admit — the U.S. certainly does —, admissions are likely to follow a hierarchy based on expectations that certain immigrants will contribute significantly to the economy and welfare of the destination country in a manner that distinguishes them from other applicants for admission. Admission standards and practices also may favor some applicants over others on the basis of race, religion, and country of origin. Immigration has changed the face of many economically developed countries and introduced a diversity of cultures into formerly homogeneous mono-cultures. Conflict zones and weak economies drive immigration from those areas to wealthier and more stable areas. At the same time, high taxes and regulation fuel emigration from wealthy stable economies to lower tax, less regulated jurisdictions. Labor flight to lower tax jurisdictions historically has not been prevalent because rendition of services has been location dependent. However, the rapid growth of technology has made many industries independent of the location of their service providers. Cross-border competition for some labor has grown. While top scientists and medical professionals have been in demand since at least the early years of the 20th century, demand for technology expertise has accompanied growing international reliance on technology. The emergence of English as a common, international language has removed linguistic barriers to international commerce and individuals with technical training and expertise are able both to work remotely and relocate. Competition for skilled individuals in many realms has become international and less developed countries which have devoted their limited resources to educating and training their citizens to develop expertise and skills are concerned about losing those they have educated to other countries that might offer higher salaries and better living circumstances. This paper explores the role that taxation plays in the movement of people and capital. Part I addresses the relationship between taxes and retention of capital, including tax incentives for capital investment, shifting tax burdens from capital to labor, and rules preventing the escape of capital from its current taxing jurisdiction. Part II considers how taxes supplement immigration policy to attract capital currently outside the jurisdiction. Part III contemplates whether taxes play any significant role in attracting or retaining skilled labor. Part IV looks at taxes and tax trends and identifies how they disadvantage or benefit fungible, frequently immigrant labor. Part V concludes that capital tax rate competition seems unlikely to prevent capital flight as it inquires whether anti-immigration and anti-immigrant public sentiment has contributed to the shift of tax burdens from capital to labor.

English

English

Intergovernmental fiscal transfers and tax efforts: Regression-discontinuity analysis for Japanese local governments

The present study examines the incentive effects of fiscal equalization transfers on local corporate tax rates from theoretical and empirical perspectives. The study focuses on additional corporate tax on capital, which is exempt from calculations of equalization grants. A theoretical investigation reveals that a rise in equalization rate increases additional capital tax rates. The theoretical prediction is empirically examined using panel data of Japanese municipalities for 1990–2000. It is found that a higher equalization rate in fiscal equalizing transfers gives municipalities an incentive to raise corporate tax rates exempt from the transfer scheme.

Macroeconomic Effects of Capital Tax Rate Changes

We study aggregate, distributional and welfare effects of a permanent reduction in the capital tax rate in a quantitative equilibrium model with capital-skill complementarity. Such a tax reform leads to expansionary long-run aggregate effects, but is coupled with an increase in wage and income inequality. Moreover, the expansionary aggregate effects are smaller when distortionary labor or consumption tax rates have to increase to finance the capital tax rate cut, driven by effects on labor supply decisions. An extension to a model with heterogeneous households shows that consumption inequality also increases in the long run, which leads to a further rise in wage inequality. We study transition dynamics and show that joint modeling of monetary and fiscal policy response is important for analyzing short-run effects. Finally, we contrast the long-term aggregate welfare gains with short-term losses, regardless of how the tax cut is financed. In the model with heterogeneous households, we additionally show that welfare gains for the skilled go together with welfare losses for the unskilled.

Políticas Fiscais para Estabilização da Dívida Pública: uma abordagem de equilíbrio geral aplicada ao Brasil

Resumo Usamos um modelo de equilíbrio geral aplicado dinâmico e determinístico com um agente representativo para avaliar alternativas de política fiscal para o Brasil. As alterações do mix fiscal que mais aumentam o produto per capita de longo prazo (em cerca de 2%) são: a redução do consumo do governo acompanhada pela redução da alíquota do imposto de renda sobre o capital e o aumento do investimento do governo financiado pela redução das transferências. A primeira delas também é a que produz o maior aumento do bem-estar. As estratégias de consolidação da dívida pública consideradas usaram apenas um instrumento fiscal e visaram reduzir a dívida pública em 10% em dez anos e sua estabilização subsequente. Sob o ponto de vista do nível de consumo e do nível do estoque de capital no longo prazo, e do fluxo descontado de bem-estar, o melhor instrumento foi na alíquota do imposto de renda sobre o capital. Sob a ótica do produto no longo prazo, o melhor instrumento foi o investimento do governo, seguido pela alíquota do imposto sobre a renda do capital.

Demographics and competition for capital in political economy

We examine the possible impacts of demographics on outcomes of competition for capital in political economy. For this, we develop a multi-region overlapping generations model, wherein public good provision financed by capital taxation is determined by majority vote. When population is growing, younger people represent the majority, whereas when it is decreasing, older people are in majority. We uncover the possible externalities arising from political processes as well as capital mobility and show that an inefficiently high capital tax rate is more likely to emerge in an economy with decreasing population than in one with growing population.

Optimal Uniform Capital Taxation in a Partially Automated Society

A recent rapid-automation movement has been displacing routine labor and has sparked a series of discussion about taxation on automation such as a robot tax. However, the government's dilemma is that the planner may want to tax such physical capital that displaces routine labor--for example, industrial robots--for redistributive motives but does not want to tax other physical capital that increases such workers' productivities for instance, collaborative robots (cobots). This paper studies a novel setting of the optimal capital taxation on physical capital in which there is asymmetric information on both labor types and capital types between the planner and market. In particular, my model focuses on a two-by-two scenario where there are two types of labor (routine and non-routine labor) and two types of capital (displacing and reinstating capital). Despite asymmetric information, I find that the optimal uniform capital tax rate over different types of capital is strictly positive, as long as the solution is interior.

Financial deepening in a two-sector endogenous growth model with productivity heterogeneity

Abstract This paper studies the effects of financial deepening and fiscal policy on human capital formation, working hours and growth in a model with financial frictions and productivity heterogeneity. The paper first shows that in the range of capital tax rates that attains a balanced growth path, taxation exerts inverted U-shaped effects on growth. The paper then analytically derives and shows that the growth maximizing tax rate and the corresponding growth are increasing concave functions of the financial deepening level. Finally, it is shown that theoretical predictions of the model are in line with data from OECD countries.

Election Timings under Globalization: A Tax Competition Approach

This paper examines how the results of elections in a country are affected by their relative timing. Particularly, I focus on the types of policymakers in terms of capital endowment for the framework of strategic delegation under tax competition. The game is composed of three stages: i) an election is held in the first-mover country and a policymaker is chosen by majority voting; ii) similarly, an election to choose a policymaker is held in the second-mover country; and iii) capital tax rates are simultaneously determined by the policymakers of both countries. As a result, it is indicated that the policymaker elected through voting by citizens in the first-mover country is likely to be less capital-rich, or relatively more left-winged, compared to that in the second-mover country. However, when income disparity within country is sufficiently large, the second-mover country becomes more redistributive.

Macroeconomic Effects of Capital Tax Rate Changes

We study aggregate, distributional and welfare effects of a permanent reduction in the capital tax rate in a quantitative equilibrium model with capital-skill complementarity. Such a tax reform leads to expansionary long-run aggregate effects, but is coupled with an increase in wage and income inequality. Moreover, the expansionary aggregate effects are smaller when distortionary labor or consumption tax rates have to increase to finance the capital tax rate cut, driven by effects on labor supply decisions. An extension to a model with heterogeneous households shows that consumption inequality also increases in the long run, which leads to a further rise in wage inequality. We study transition dynamics and show that joint modeling of monetary and fiscal policy response is important for analyzing short-run effects. Finally, we contrast the long-term aggregate welfare gains with short-term losses, regardless of how the tax cut is financed. In the model with heterogeneous households, we additionally show that welfare gains for the skilled go together with welfare losses for the unskilled.

Dynamic Fiscal Competition: A Political Economy Theory

I develop a political economy theory of dynamic fiscal competition via public spending and debt. With internationally mobile capital, strategic policies generate two cross-border externalities that voters in each country fail to internalize: (1) an increase in public spending that bolsters capital accumulation but also (2) a race to the top in public debt which crowds out capital. The relative size of these two externalities varies with the number of financially integrated countries and interacts with the domestic political conflict between young and old voters. Despite residence based taxation, capital tax rates are lower under strategic policies than under coordination. Furthermore, they may decline with financial integration. Strategic policies lead to lower long run output and welfare relative to coordination but are preferred by subse-quent generations of voters if the number of financially integrated countries is low or the political weight of the young is high.

Tax Competition and Strategic Delegation with Interregional Asymmetries in Capital Endowment and Income Inequality

This study examines a two-country tax competition model, in which the capital endowment and income inequality are asymmetric in each country. Hwang and Cheo [1] and Peralta and van Ypersele [2] show that when countries differ in capital endowments, the country with the higher capital endowment sets a lower capital tax rate. However, their studies assume that all inhabitants are homogeneous. We extend the models of the two aforementioned studies and conduct an analysis taking into account the asymmetry in income inequality within countries. The tax rate is set by the policy maker elected by majority voting in each country’s election. We find that a higher tax rate may be set in the country with higher capital endowment under certain conditions. Further, if the income inequality is sufficiently large, the median voters in each country unambiguously delegate the right to decide the tax rate to residents who prefer a higher tax rate than their own, regardless of the capital endowments of the two countries.

Optimal effective tax structure for innovation-led economy in theoretical model

This paper constructs an effective tax rate structure model for innovation-led economy and estimates the common factors affect TFP. The results show that the labor effective tax rate, the consumption effective tax rate and the capital effective tax rate can affect TFP. The key to building an innovative economy and improving TFP is to increase R&D investment and optimize tax structure.

Dynamic fiscal competition: A political economy theory

I develop a political economy theory of dynamic fiscal competition via public spending and debt. With internationally mobile capital, strategic policies generate two cross-border externalities that voters in each country fail to internalize: (1) an increase in public spending that bolsters capital accumulation but also (2) a race to the top in public debt which crowds out capital. The relative size of these two externalities varies with the number of financially integrated countries and interacts with the domestic political conflict between young and old voters. Despite residence based taxation, capital tax rates are lower under strategic policies than under coordination. Furthermore, they may decline with financial integration. Strategic policies lead to lower long run output and welfare relative to coordination but are preferred by subsequent generations of voters if the number of financially integrated countries is low or the political weight of the young is high.

Финансовая репрессия и популизм

Due to its implicit nature, financial repression is a convenient fiscal policy measure for the populist government. Financial repression gives the populist government the opportunity to finance more government spending with less explicit taxes. The optimal parameters of financial repression in the form of nonmarket debt placement are determined for the populist government. Populism is introduced by the choice of government spending and tax on capital higher and lower respectively than those chosen through voting procedure. The overlapping generations model with a fully funded pension system and financial repression is used to determine the optimal fiscal policy of the populist government. Moreover, the influence of the two fiscal regimes on household welfare is considered. It is shown that financial repression in the form of nonmarket debt placement is an element of the optimal fiscal policy for the populist government. Such government will set the gross interest rate on government bonds lower than the gross interest on capital by placing its debt in the captive pension fund. This leads to the fall in the pension fund’s yield and to the decrease in household wealth. The optimal repressed interest rate on government bonds is higher the bigger the population growth rate is, the less the government is addicted to populism and the lower is the elasticity of substitution between consumption and government spending. We also show that the financial repression regime under populism is associated with higher welfare compared to the voting regime without populism. This result is the consequence of the fact that the populist policy allows the reduction of the distorting capital tax rate and its replacement by lump-sum financial repression.

Financial Deepening in a Two-Sector Endogenous Growth Model with Productivity Heterogeneity

This paper studies the effects of financial deepening and public spending on human capital formation, working hours and growth in a model with financial frictions and productivity heterogeneity. The paper first shows that in the range of capital tax rates that attains a balanced growth path, taxation exerts inverted U-shaped effects on growth. The paper then analytically derives and shows that the growth maximizing tax rate and the corresponding growth are increasing concave functions of the financial deepening level. Finally, it is shown that theoretical predictions of the model are in line with data from OECD countries.

NEWS ABOUT TAXES AND EXPECTATIONS-DRIVEN BUSINESS CYCLES

This paper analyzes the possibility of expectations-driven business cycles to emerge in a one-sector real business cycle model if the unique driving force is news about future income tax rates. We find that good news about labor income tax rates cannot generate expectations-driven business cycles, whereas good news about capital income tax rates can. We show that a one-sector real business cycle model enriched with (i) variable capital utilization and (ii) investment adjustment costs and driven solely by news shocks about capital income tax rates is able to generate qualitatively and quantitatively realistic business cycle fluctuations. In contrast to numerous studies in the news-driven business cycle literature, our model maintains separable preferences.

Fiscal policy under a minimum-time objective

In an endogenous growth model, we characterize the fiscal policy driven by a minimum-time objective of economic development. We find that in equilibrium government should levy the highest possible consumption taxes, reduce public expenditures to the lowest possible level, and keep labor income tax rate and capital income tax rate satisfy a substitution relationship at the balanced budget constraint. We also identify the condition under which income tax rate should be set to zero. We further find that the equilibrium fiscal policy is equivalent to the growth-maximizing fiscal policy, whereas it generally deviates from the welfare-maximizing fiscal policy. We hence identify a circumstance where setting the policy goal of reaching an economic-performance target as soon as possible cannot be justified in the sense of maximizing the welfare of households.

Tax competition among U.S. states: Racing to the bottom or riding on a seesaw?

Dramatic declines in capital tax rates among U.S. states and European countries have been linked by many commentators to tax competition, an inevitable “race to the bottom,” and underprovision of local public goods. This paper analyzes the reaction of capital tax policy in a given U.S. state to changes in capital tax policy by other states. Our study is undertaken with a novel panel data set covering the 48 contiguous U.S. states for the period 1965 to 2006 and is guided by the theory of strategic tax competition. The latter suggests that capital tax policy is a function of “foreign” (out-of-state) tax policy, preferences for government services, and home state and foreign state economic and demographic conditions. The slope of the reaction function – the equilibrium response of home state to foreign state tax policy – is negative, contrary to casual evidence and many prior empirical studies of fiscal reaction functions. This result, which stands in contrast to most published findings, is due to two critical elements that allow for delayed responses to foreign tax changes and responses to aggregate shocks. Omitting either of these elements leads to a misspecified model and a positively sloped reaction function. Our results suggest that the secular decline in capital tax rates, at least among U.S. states, reflects synchronous responses among states to common shocks rather than competitive responses to foreign state tax policy. While striking given prior empirical findings, these results are fully consistent with the implications of the theoretical model developed in this paper and presented elsewhere in the literature. Rather than “racing to the bottom,” our findings suggest that states are “riding on a seesaw.” Consequently, tax competition may lead to an increase in the provision of local public goods, and policies aimed at restricting tax competition to stem the tide of declining capital taxation are likely to be ineffective.

The short-run effects of EU funds in Spain using a CGE model: the relevance of macro-closures

This paper evaluates the impact of the structural and cohesion funds received by Spain in the period 2007–2013. The analysis is performed with a detailed computable general equilibrium (CGE) model calibrated with a SAM for Spain in 2005 elaborated by the authors, which contains highly detailed information on capital goods and tax rates. The aim of this paper is to quantify the short-run effects of the EU funds in the Spanish economy, which can help economic recovery. Additionally, it is evaluated to what extent these short-run effects may be over- or underestimated due to the closure rule used in this kind of models (neoclassical or Keynesian). The closure determines the endogenous variables in the market clearance conditions, and they affect the results of shocks in final demand. The conclusions show that neoclassical closure, used in previous CGE studies done for Spain, underestimates the impact they have on employment and GDP and captures a fictitious shock in private investment. In this case, employment and real GDP do not almost change, while under Keynesian rule they increase in 1.2 and 0.68%, respectively. These results invalidate some of the estimates derived from previous studies and suggest that the best option to quantify the likely positive short-run effects of raising public investment is only captured through Keynesian closure.