Changes In Statutory Tax Rates Research Articles

Tax avoidance over time: A comparison of European and U.S. firms

In recent years, the international tax policy debate has focused on the tax avoidance strategies applied by multinational firms. We investigate whether differences can be observed over time between the tax avoidance behaviors of U.S. firms and those of firms from 12 European countries. Our results show that the mean effective tax rate (ETR) of U.S. firms and that of firms in large European countries, such as France and Germany, are similar. Additionally, we investigate whether changes in statutory tax rates (STRs) explain the declining ETRs of European firms. In contrast to observations for the U.S., we find that the gap between the STR and the ETR significantly decreases over time for EU firms. This finding suggests that tax avoidance in EU firms may have, on average, decreased over time.

The impact of personal income tax rates on the employment decisions of small businesses

PurposeSmall businesses file taxes in accordance with the personal income tax code because they are considered flow-through entities. Thus, personal income tax reforms directly affect the incentives small business owners face regarding employment and operations. The paper aims to discuss these issues.Design/methodology/approachThe authors use the changes in personal income tax rates during the 1993 and 2001-2003 reforms and micro-level data to estimate the effect of statutory tax rate changes on small business employment decisions.FindingsThe authors add two contributions to the current literature: first, the author allow for intertemporal tax planning and second, the author allow the firm’s decision to employ labor to be correlated with the firm’s wage bill decision. Estimation of a Heckman selection model for wage bills shows that the probability that a business will employ labor is 1.18 percent higher when current tax rates increase by one percentage point and 0.70 percent lower when future rates are expected to increase by one percentage point. Among firms that already employ labor, the median wage bill elasticity with respect to current tax rates is −0.64. These estimates are larger than those reported in previous research because my model includes future taxes and allows for correlation between the firm’s employment and wage bill decisions. Omitting the intertemporal tax responses biases the estimates of previous researchers upwards, whereas assuming the two firm decisions are independent biases estimates towards zero.Originality/valueThis paper has been cited in publications published in Journal of Entrepreneurship and Public Policy.

Determinants of statutory tax rate changes by the Canadian provinces

Tax rate changes are some of the most significant and far-reaching decisions a government can take. In this paper we investigate the various fiscal and political factors that influence a government’s statutory tax rate change choices. We employ a multinomial logit model to empirically investigate the likelihood of changes to personal income tax, corporate income tax, and provincial sales tax rates by Canadian provincial governments over the period 1973–2010. Our results indicate that provincial governments that start with higher tax rates are more likely to cut, and less likely to raise, their tax rates. Another important implication of our results is that ideology matters—provinces with left-leaning governments are less likely to cut and more likely to raise their tax rates. The results are robust to various sensitivity checks.

The Timing and Direction of Statutory Tax Rate Changes by the Canadian Provinces

Tax rate changes are some of the most significant and far-reaching decisions a government can take. A good understanding of the odds of any such changes is essential for any business debating the timing and location of investments. This paper investigates the factors that affect the timing of statutory tax rate changes by Canadian provincial governments. The authors develop a simple theoretical model to explain the “stickiness” of tax rates — the factors that lead a province to decide against tinkering with the tax system — based on the presence of fixed costs of adjusting tax rates. The results indicate that if the current rate falls within a range of tax rates bracketing the optimal rate, then the government will not adjust its tax rate because the cost of the reform outweighs the potential benefits. To build up a body of evidence, this paper employs a multinomial logit model to examine the likelihood of changes to personal income tax (PIT), corporate income tax (CIT), and provincial sales tax (PST) rates by provincial governments over the period 1973-2010. Regression results indicate that provincial governments that start with higher tax rates are more likely to cut, and less likely to raise, their tax rates. A higher provincial budget deficit reduces the probability of a CIT rate cut and raises the probability of a PST rate increase. Party ideology seems to matter. Provinces with left-leaning governments are less likely to cut PIT and PST rates, and more likely to raise PIT rates compared to non-left-leaning governments. The authors also find that a federal PIT rate cut raises the probability of a provincial PIT rate increase, whereas a federal CIT rate cut raises the probability of a provincial CIT rate reduction.

Estimating Dynamic Income Responses to Tax Reform

Abstract We study income responses to income tax changes by using a large panel of Swedish tax payers over the period 1991–2002. Changes in statutory tax rates as well as changes in tax bracket thresholds provide exogenous variations in tax rates that can be used to identify income responses. We estimate dynamic income models which allow us to distinguish between short-run and long-run effects in a straightforward fashion. For men, the estimates of the long-run elasticity of income with respect to the net-of-tax rate hover in a range between 0.10 and 0.30. The estimates for women are statistically insignificant. We simulate the fiscal consequences of a tax reform that reduces the top marginal tax rate by five percentage points. Such a reform may have negligible effects on tax revenues when the interactions between income taxes and other taxes are taken into account.

Determinants of the Choice between Roth and Deductible IRAs

This study examines tax and non-tax determinants of the choice between Roth and deductible Individual Retirement Accounts (IRAs). I find evidence that higher current tax rates relative to average tax rates are positively, but modestly, related to the probability that a taxpayer will contribute to a deductible IRA rather than a Roth IRA. I also find that taxpayers with greater liquidity are more likely to choose a Roth IRA, which is the option with a higher effective contribution limit. The results relate to the question of whether taxpayers behave in a tax-efficient manner and the behavioral response to statutory tax rate changes.

Determinants of the Choice between Roth and Deductible IRAs

This study examines tax and nontax determinants of the choice between Roth and deductible Individual Retirement Accounts (IRAs). I find evidence that higher current tax rates relative to average tax rates are positively, but modestly, related to the probability that a taxpayer will contribute to a deductible IRA rather than a Roth IRA. I also find that taxpayers with greater liquidity are more likely to choose a Roth IRA, which is the option with a higher effective contribution limit. The results relate to the question of whether taxpayers behave in a tax‐efficient manner and the behavioral response to statutory tax rate changes.

Effects of Tax Rate Changes on the Cost of Capital: The Case of Japanese Firms

The paper studies the effects that tax rate changes have on the cost of capital when firms follow target leverage ratios. We show that changes in individual income tax rates are neutral. The focus therefore is on the effects of changes in marginal corporate tax rates. These effects are computed for Japanese firms. Special emphasis is given to changes in statutory tax rates and provisions that allow firms to carry their losses forward.

Estimating Income Responses to Tax Changes: A Dynamic Panel Data Approach

Recent research on the behavioral effects of income taxes has to a large extent focused on the elasticity of taxable income with respect to the net-of-tax rate, i.e., one minus the marginal tax rate. We offer new evidence on this matter by making use of a large panel of Swedish tax payers over the period 1991-2002. Changes in statutory tax rates as well as discretionary changes in tax bracket thresholds provide exogenous variations in tax rates that can be used to identify income responses. We estimate dynamic income models which allow us to distinguish between short-run and long-run effects in a straightforward fashion. The estimates of the long-run elasticity of income with respect to the net-of-tax rate typically hover in a range between 0.20 and 0.30. The short-run elasticities are in general smaller but less precisely estimated. We use the estimates to simulate the fiscal consequences of a tax reform that reduces the top marginal tax rate by five percentage points. Such a reform turns out to have negligible effects on tax revenues and may even yield a fiscal surplus.

The Effects of Income Tax Rate Uncertainty in a Dynamic Setting

Most discussion of income tax policy focuses on the expected efficiency or equity gains that could result from alterations in income tax codes. Often overlooked is the uncertainty that is generated when taxpayers anticipate a change in the tax laws. For example, over the last decade the income tax codes in the U.S. have undergone three significant revisions and, while each of these revisions was accompanied by extensive debate concerning the effects of changes in particular statutory provisions, the uncertainty generated by such rapid changes in the tax codes received little attention. It is likely that the timing of these revisions as well as the revisions themselves were difficult to predict and, consequently, contributed to the uncertainty facing taxpayers. While income tax codes may be subject to a wide variety of changes, arguably the most consequential is a change in tax rates, given a fixed tax base. With a fixed tax base, changes in statutory tax rates translate into changes in effective tax rates. Because changes in effective rates have such a pervasive influence on decision making, it seems reasonable to expect that uncertainty regarding future effective tax rates may have serious consequences. We explore the impact of this particular form of tax code uncertainty on an individual's saving and portfolio decision making in a dynamic setting. Throughout our analysis the tax base is unchanging, so that we do not bother to distinguish between effective and statutory tax rates. In this setting we assume that the timing of tax rate changes is uncertain and that, if a change occurs, the new tax rate is unpredictable. We find that more (less) risk averse taxpayers will respond to an increase in the likelihood of a change in the tax code or an increase in the variability of future tax rates by increasing (decreasing) saving. We are also able to characterize those situations in which an increase in the likelihood of a change in the tax code or an increase in the variability of future tax rates will depress risk-taking. There is a growing literature that examines the effects of income tax uncertainty. For example, Auerbach and Poterba [3] and Bernheim [4] have dealt with uncertainty that alters a firm's taxable income, and, consequently, the effective tax rate faced by the firm. Auerbach and Hines [2] have analyzed corporate investment behavior in the U.S. by taking into account the possibility that investors anticipate future changes in tax laws. Models that examine the welfare consequences of uncertain tax rates have been developed by Weiss [9] in a static setting and by Bizer and Judd [5] in a dynamic setting. Estimates of the welfare costs associated with statutory tax uncertainty in