Income Tax Cuts Research Articles

The Fiscal State-Dependent Effects of Capital Income Tax Cuts

Using the post-WWII data of U.S. federal corporate income tax changes, within a Smooth Transition VAR, this paper finds that the output effect of capital income tax cuts is government debt-dependent: it is less expansionary when debt is high than when it is low. To explore the mechanisms that can drive this fiscal state-dependent tax effect, the paper uses a DSGE model with regime-switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment. As government debt increases to a sufficiently high level, the probability of future fiscal adjustments starts rising, and the expansionary effects of a capital income tax cut can diminish substantially, whether the expected adjustments are through a policy reversal or a consumption tax increase. Also, a capital income tax cut need not always have large revenue feedback effects as suggested in the literature.

International effects of corporate tax cuts on income distribution

AbstractThis paper evaluates the domestic and cross‐country effects of corporate income tax (CIT) cuts on income inequality using a tractable multi‐country DSGE model calibrated to U.S. and Canadian data. We illustrate that the cross‐border propagation of differentiated equity holdings can help explain the increase in income inequality, both within‐ and cross‐country, in response to a CIT cut. A lower barrier to capital mobility alleviates this divergence in income, while lower trade costs exert little effects on income distribution. The model is also consistent with recent evidence that middle‐income workers experience lower income growth than their counterparts in either extreme of the skill spectrum.

Economics of energy subsidy reforms in Bangladesh

As in many countries around the world, subsidies to energy in Bangladesh impose a significant fiscal burden, with benefits that disproportionately accrue to high-income households. Using a computable general equilibrium model, this study investigates the economy-wide impacts of the removal of direct subsidies in the electricity sector and indirect subsidy in natural gas in Bangladesh. The study finds that the removal of energy subsidies would be beneficial to the economy and would increase GDP. The magnitude of the economic impact depends on how the budgetary savings from the removal of electricity subsidy and the increased revenues due to the removal of indirect subsidies to natural gas are reallocated to the economy. Recycling the savings (or the new revenues) to fund investment would benefit the country most, followed by the case of utilizing them to fund cuts in income taxes, and finally to fund cuts in indirect taxes. While the reallocation of budgetary savings to households through lump-sum transfers is found inferior to other recycling options considered, it could be the preferred from the distributional perspective. However, further analysis is needed to confirm this.

Effects of temporary corporate income tax cuts: Evidence from Vietnam

Using a quasi-experimental design and panel data from 2004 to 2014, I estimate how temporary 30% corporate income tax cuts affected firm investment, employment, profits, and tax revenue during the Global Financial Crisis in Vietnam. I find that investment increased during the policy year and came back to its pre-policy level after the policy ended. The evidence does not suggest there were any significant changes in employment. Reported profits of eligible foreign-owned firms doubled in the policy year and remained high after the policy ended. I find no evidence that profits of foreign-owned firms increased because of changes in labor or capital. Instead, multinational firms likely shifted reported profits to take advantage of the tax policy. Tax payments by foreign-owned firms increased, while those by domestic firms decreased.

The Effects of Permanent Income Tax Cuts on Emigration from Israel

Abstract In this paper, we estimate the effect on emigration of the permanent income tax reductions implemented in Israel during the period 2004–2010. We find that emigration flows from Israel declined, especially for brackets that benefited from a larger tax reduction. We also find that the effect is stronger for younger workers than for older ones, a result consistent with the former group deriving expected tax benefits over a longer duration of time.

The Fiscal State-Dependent Effects of Capital Income Tax Cuts

Using the post-WWII data of U.S. federal corporate income tax changes, within a Smooth Transition VAR, this paper finds that the output effect of capital income tax cuts is government debt-dependent: it is less expansionary when debt is high than when it is low. To explore the mechanisms that can drive this fiscal state-dependent tax effect, the paper uses a DSGE model with regime-switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment. As government debt increases to a sufficiently high level, the probability of future fiscal adjustments starts rising, and the expansionary effects of a capital income tax cut can diminish substantially, whether the expected adjustments are through a policy reversal or a consumption tax increase. Also, a capital income tax cut need not always have large revenue feedback effects as suggested in the literature.

US Corporate Tax Cuts: Spillovers to the Irish Economy

We examine spillovers to the Irish economy from US corporate income tax rate cuts and find they lead to a small but persistent increase in Irish economic output. Our analysis of the transmission channels shows that an increase in investment, employment and exports in the externally-financed industrial sector largely drives this expansion. We also find that output spillovers from US corporate income tax cuts are larger when there is slack in the Irish labour market. Our findings suggest that the changing structure of the Irish economy means any spillovers to real economic activity from the recent US corporate tax cuts could be relatively minor. However, the larger presence and shifting focus of foreign multinational corporations’ operations in Ireland means lessons from past US corporate tax cuts may be of limited value in predicting the effects of the recent US tax system reform.

Impacts of a carbon tax across US household income groups: What are the equity-efficiency trade-offs?

This paper assesses the impacts across U.S. household income groups of carbon taxes of various designs. We consider both the source-side impacts (reflecting how policies affect wage, capital, and transfer incomes) as well as the use-side impacts (reflecting how policies alter the prices of goods and services purchased by households). We apply an integrated general equilibrium framework with extended measures of the source- and use-side impacts that add up to the overall welfare impact. Our results indicate that the distributional impacts depend importantly on the nature of revenue-recycling and the treatment of transfer income. In the absence of targeted compensation to achieve distributional objectives, the use-side impacts tend to be regressive while the source-side impacts are progressive, and the progressive source-side impacts tend to offset fully the regressive use-side impacts. Both impacts are considerably larger when one employs the more comprehensive welfare measures introduced in this study. The efficiency costs of targeted compensation to achieve distributional objectives depend critically on the recycling method and compensation target. These costs are an order of magnitude higher when the remaining revenues after compensation are used for corporate income tax cuts, compared with costs when remaining revenues are used other ways. Efficiency costs also rise dramatically when targeted compensation extends beyond the lowest income quintiles.

Can Corporate Income Tax Cuts Stimulate Innovation?

We hypothesize that corporate income taxes distort firms’ incentives to innovate by reducing their pledgeable income. Using a differences-in-differences methodology, we document that large corporate income tax cuts boost corporate innovation. We find a similar but opposite effect for tax increases. Most of the change in innovation occurs 2 or more years after the tax change, and there’s no effect before the tax change. Exploring the mechanisms, we show that tax cuts have a stronger impact on innovation for firms with weaker governance, greater financial constraints, fewer tangible assets, smaller patent stock, and a greater degree of tax avoidance.

US Corporate Tax Rate Cuts: Spillovers to the Irish Economy

We examine spillovers to the Irish economy from US corporate income tax rate cuts and find they lead to a small but persistent increase in Irish economic output. Our analysis of the transmission channels shows that an increase in investment, employment and exports in the externally-financed industrial sector largely drives this expansion. We also find that output spillovers from US corporate income tax cuts are larger when there is slack in the Irish labour market. Our findings suggest that the changing structure of the Irish economy means any spillovers to real economic activity from the recent US corporate tax cuts could be relatively minor. However, the larger presence and shifting focus of foreign multinational corporations’ operations in Ireland means lessons from past US corporate tax cuts may be of limited value in predicting the effects of the recent US tax system reform.

Tax Progressivity in Australia: Facts, Measurements and Estimates

We study the progressivity of Australia’s personal income tax system after the introduction of a New Tax System (Goods and Services Tax) Act 1999. We use two data sets: administrative data from Australian Tax Office (ATO) 2004-16 and survey data from the Household Income and Labour Dynamics in Australia (HILDA) survey 2001-16. We first document the distributions of income and tax liabilities, properties of the joint distributions of taxes paid and income, and discuss how taxes are varied across households and over time. We next provide estimates of tax progressivity using two approaches: one based on tax liability progression and one based on tax liability distribution relative to income distribution. The result obtained from the tax progression approach implies a significant decline in the average level of tax progressivity since 2004. Meanwhile, the result obtained from the tax distribution approach indicates a tax progressivity cycle with a modest decline up to 2006, then a sharp increase until 2010, and a slight decline thereafter. The personal income tax cuts for all taxpayers in early 2000s and the introduction of tax offset for low income earners (LITO) are main driving forces. Moreover, the evolution of income distribution and its interactions with bracket creep strongly affect the overall progressivity level of Australia’s income tax system. Hence, our findings provide new insights into the dynamics of income growth and tax progressivity, which has implications for tax policy debates in Australia.

Budget Innovations at the Period of Trump’s Presidency: Social Dimension

Tax cuts and spending cuts go hand in hand at the beginning of the Trump epoch. The paper focuses on the social effects of the tax reform and new budget priorities which come along with steps aimed to move more people from welfare into the workforce. For a vast majority of Americans, the Tax Cuts and Jobs Act will lower their federal tax bill in the coming years due to the new rates, new tax brackets, much larger standard deductions, expanded child tax credit. The high quintiles pay the biggest share of the tax burden, so they will receive the largest volume in tax cuts. Income tax cuts, coming along with growing defense and infrastructure spending may significantly increase the budget deficit and national debt in the nearest future, and require huge slashing federal spending which would affect welfare programs for the low-income Americans. There are nо plans to cut Social Security benefits as the main driver of federal spending; but social expenditures which comprise cash benefits, direct in-kind provision of goods and services are proposed to being cut. The category of funding targeted by the Trump plan covers a wide rangeof basic services, from medical care to education programs, child care, housing assistance for low-income families.

Technology and the Future of Work

This paper uses a DSGE model to simulate the impact of technological change on labor markets and income distribution. It finds that technological advances offers prospects for stronger productivity and growth, but brings risks of increased income polarization. This calls for inclusive policies tailored to country-specific circumstances and preferences, such as investment in human capital to facilitate retooling of low-skilled workers so that they can partake in the gains of technological change, and redistributive policies (such as differentiated income tax cuts) to help reallocate gains. Policies are also needed to facilitate the process of adjustment.

A Study on the Impact of Transaction Taxes on Property Prices

The objective of this study is to investigate whether changes in acquisition tax rates and transfer income tax rates have affected property prices in Korea. In addition, we have tested the hypotheses on investors’ psychology and reactions by applying a Matheson’s Model(2011) which has focused on the impact of transaction taxes on stock prices. Considering the difference between the stock market and real estate market, we have modified Matheson’s Model in order to analyze the data collected from the Korean real estate register system. The results show that the acquisition tax rate hikes have resulted in lower DACT(decease of property price due to change in trade tax) values; this means that the winning investors have increased their holding periods of property long enough to offset the impact of the higher tax rates. In contrast, acquisition tax rate cuts have generated the certainty impact on both winning and losing investors and have led them show irrational investment behavior according to the value curve of prospect theory in Kahnenman and Tversky(1979). As for the transfer income tax rate hikes and cuts, winning investors have reacted more strongly to tax rate cuts than to tax rate hikes, shortening their holding periods and thus raising the DACT values.

Tax reform in Japan: Is it welfare-enhancing?

The ongoing tax reform in Japan, particularly a corporate income tax cut financed by an increase in consumption tax, is expected to bring positive effects on investment and output. However, the overall effects on government fiscal balance and welfare can be ambiguous, depending on the dynamic responses of macroeconomic variables to changes in tax rates. This paper aims to provide quantitative forecasts of Japanese tax reform on welfare and fiscal balance using a small open two-sector dynamic general equilibrium model calibrated to the Japanese economy. The simulation results show that under conditions of unrestricted international borrowing and no consumption habit, a corporate income tax cut of 5% financed by an increase in consumption tax improves welfare by 0.53%. However, the positive effects of corporate income tax cuts decrease when international borrowing becomes limited or consumers show habit formation. In addition, we show that a corporate income tax cut in the tradable sector generates better welfare and fiscal consequences than a tax cut in the nontradable sector.

The Short-term Effects of the Kansas Income Tax Cuts on Employment Growth

The state of Kansas made dramatic changes to the structure of its personal income tax by eliminating taxation of business income and lowering marginal tax rates on other personal income sources. Proponents of the legislation maintain that the tax reductions will stimulate employment growth. Using a difference-in-differences approach, we estimate the impact of the tax changes on private-sector employment in the state of Kansas, relative to its border states, using data on the number of establishment employees and proprietors. We apply multistate county fixed effect model and county-border matching approaches to identify tax effects. Our findings indicate that two years post enactment, the tax law changes have not yielded a net increase in private-sector employment.

Financial Transactions Taxes: Potential Revenue and Economic Implications

Given Donald Trump’s extreme income tax–cut proposal, even useful tax hikes may not be likely. But down the road, there may be a call for higher taxes again to support social policies and manage, in the minds of Republican sponsors of tax cuts, a bulging deficit. This economist argues that a financial transactions tax can both rein in financial excesses and raise significant revenues. Computing the benefits is not easy, and we present his full analysis, which we think is a significant contribution.

Corporate Income Tax, Legal Form of Organization, and Employment

A dynamic stochastic occupational choice model with heterogeneous agents is developed to evaluate the impact of a corporate income tax reduction on employment. In this framework, the key margin is the endogenous entrepreneurial choice of the legal form of organization. A reduction in the corporate income tax burden encourages adoption of the C corporation legal form, which reduces capital constraints on firms. Improved capital reallocation increases the overall productive efficiency in the economy and therefore expands the labor market. Relative to the benchmark economy, a corporate income tax cut can reduce the nonemployment rate by up to 7 percent. (JEL E24, H25, H32, J23, J24)

Do Corporate Income Tax Cuts Decrease Labor Share? Regression Discontinuity Evidence from China

Recent years have seen a sustained decline in the labor share around the world. This paper studies this trend by focusing on the effect of corporate income taxes on firm-level labor shares. From 2010 to 2013, the Chinese central government cut the corporate income tax rate in 21 cities for service firms whose revenue from outsourcing services offshore surpassed half of their total revenue. Leveraging a regression discontinuity design with proprietary administrative data, we find that a one percentage point decrease in the statutory corporate income tax rate induces a one percentage point decrease in the firm-level labor share. Firms respond to the tax cut by increasing their physical capital and bank borrowing while keeping their employment unchanged, consistent with a capital deepening process documented in recent theoretical models. Our results suggest that falling corporate income taxes could have contributed to the global decline in the labor share.

Should Euro Area Countries Cut Taxes on Labour or Capital in Order to Boost Their Growth?

The large imbalances within euro area have led to renew interest in tax policies that could reduce labour costs and thus improve competitiveness and growth. In this paper, we consider whether it would be more growth-enhancing for euro area countries to, instead, use capital income tax cuts. To address this issue, we focus on the open-economy dimension and make the simplifying assumption of complete insurance markets. Using a DSGE model calibrated for France within the euro area, we show that the increase in output resulting from tax cuts on capital income would indeed be higher than the increase in output resulting from tax cuts on labour, both in the short and long run. Importantly, the strong response of output to capital income tax cuts appears to be partly explained by the particularly high level of capital income taxes in France. Moreover, such tax cuts would be less efficient if they were expected to be only temporary. Finally, we illustrate our main points through a recent fiscal package implemented in France, which combines labour and capital income tax cuts. After briefly assessing this package, we find that investment and real output would have been more strongly boosted in the medium run if this package had been focused to a larger extent on reductions in capital income taxes.