Effect Of Marginal Tax Rates Research Articles

The Effect of Tax Avoidance on Capital Structure Choices

In this study, we examine whether tax avoidance affects firm-level external financing choices. We hypothesize that firms marginally choose equity over debt because tax avoidance generates incremental cash flows but is likely risky. Consequently, we predict that tax avoidance induces a relative price increase in debt relative to equity. Our results are consistent with tax avoidance inducing firms to choose equity over debt. Importantly, our theory and results are distinct from the effects of marginal tax rates on capital structure (e.g., Modigliani and Miller 1963) and we control for marginal tax rates in all specifications. From an identification standpoint, we use path analyses, a plausibly exogenous 9th Circuit decision and cross-sectional tests to support our main results. To our knowledge, our study is the first to examine the relationship between capital structure decisions and tax avoidance.

Revenue-maximizing tax rates in personal income taxation in the presence of consumption taxes: a note

ABSTRACTThis article computes revenue-maximizing tax rates in personal income taxes in the presence of consumption taxes. It finds that the traditional Laffer analysis, which neglects the effects of marginal tax rates on consumption, overestimates the magnitude of revenue-maximizing tax rates. The bias caused by this oversight is computed.

Marginal Taxes: A Good or a Bad for Wages?: The Incidence of the Structure of Income and Labor Taxes on Wages

Empirical evidence so far found ambiguous results for the direction of effect of marginal income tax rates on employee remuneration. Based on the GSOEP data from 2002 through 2008 this study analyzes the impact of the marginal tax load on the employee side on the wage rate also allowing average tax rates and employer payroll taxes to play a role. Instrumental variable estimation based on counterfactual tax rates simulated in a highly detailed microsimulation model (STSM) heals the endogeneity problem of the tax variables with regard to wages. Estimations in first differences show that marginal taxes overall have a negative impact on wages. But this effect is not uniform along the wage distribution; while the negative effect of marginal tax rates prevails in the lower part of the distribution, observations beyond the median benefit from higher tax rates at the margin.

The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era

This paper uses the interwar United States as a laboratory for investigating the incentive effects of marginal income tax rates. We examine the impact of the large changes in rates in this period on taxable income using time-series/cross-section analysis of data by small slices of the income distribution. We find that the effect operated in the expected direction but was economically small, and that it is precisely estimated and highly robust. We also find suggestive time-series evidence of a positive impact of marginal rate cuts on business formation, but no evidence of an important effect on other indicators of investment. (JEL D31, H24, H31, M13, N42)

Public Provision of Private Goods and Nondistortionary Marginal Tax Rates

The incidence and efficiency losses of taxes have usually been analysed in isolation from public expenditures. This negligence of the expenditure side may imply a serious misperception of the effects of marginal tax rates. The reason is that part of the marginal tax may in fact be payment for publicly provided goods and reflects a cost that the consumers should bear in order to face the proper incentives. Hence, part of the marginal tax serves the same role as a market price in the sense that it conveys information about a real social cost of working more hours. We develop this idea formally by studyng an optimal income tax model in combination with a type of public provision scheme not analyzed debore; the provision level is individualized and positively associated with the individual's labor supply. As examples we discuss child care, elderly care, primary education and health care. We show that there ia s gain in efficiency where public provision of such a service replaces market purchases, We also show that it is necessary of efficiency that marginal income tax rates are higher than in economies where the services are purchased in the market. This is because the optimal tax should be designed so as to face the taxpayers with the real cost of providing the services. Hence, it might very well be that economies with higher marginal tax rates have less severe distortions than economies with lower marginal tax rates.

The effect of marginal tax rates on income: a panel study of ‘bracket creep’

This paper uses a panel of individual tax returns and the ‘bracket creep’ as source of tax rate variation to construct instrumental variables estimates of the sensitivity of income to changes in tax rates. From 1979 to 1981, the US income tax schedule was fixed in nominal terms while inflation was high (around 10%). This produced a real change in tax rate schedules. Taxpayers near the top-end of a tax bracket were more likely to creep to a higher bracket and thus experience a rise in marginal rates the following year than the other taxpayers. Compensated elasticities can be estimated by comparing the differences in changes in income between taxpayers close to the top-end of a tax bracket to the other taxpayers. These estimates, based on comparisons between very similar groups, are robust to underlying changes in the income distribution, such as a rise in inequality. The elasticities of taxable income and adjusted gross income are around 0.4 and significant but the elasticities of wage income are in general insignificant and close to zero.

The effect of marginal tax rates on taxable income: a panel study of the 1988 tax flattening in Canada

Federal tax reform in 1988 flattened the Canadian personal income tax schedule, changing the marginal tax rates for many individuals. Using methods similar to those applied by Auten and Carroll [Rev. Econ. 81(4) (1999) 681] in the study of the effects of the 1986 U.S. Tax Reform Act, we estimate the responsiveness of income to changes in taxes to be substantially smaller in Canada. However we find evidence of a much higher response in self-employment income, in the labor income of seniors and from those with high incomes.

The Influence of Income Taxes on the Use of Inside and Outside Debt By Small Businesses

We investigate the effect of taxes on the utilization of inside debt (loans from owners) and outside debt (loans from nonowners) across small businesses organized as taxable corporations and flow-through entities (Subchapter S corporations and partnerships). We find that the tax incentives to use debt differ according to the type of debt and the type of entity. Our results indicate that the effect of marginal tax rates on the use of outside debt and other non-debt tax shields is similar for both taxable and flowthrough entities. In contrast, we find that marginal tax rates are unrelated to the use of inside debt by flow-through entities.

Tax Policy and Entrepreneurial Entry

Many models of tax-policy evaluation abstract from decisions about entrepreneurship, such as entry, saving, and investment. Given recent emphasis on the significance of business ownership in explaining aggregate wealth accumulation and its distribution (see e.g., Gentry and Hubbard, 1999; Vincenzo Quadrini, 1999), such omissions are likely to be significant. In addition, entrepreneurs’ decisions may account for much of the responsiveness of taxable income to changes in marginal tax rates. We focus on impacts of tax rates and, in particular, tax progressivity on the decision to become an “entrepreneur.” While recent research has examined effects of marginal tax rates on investment decisions of entrepreneurial households (Robert Carroll et al., 1997), analysis of effects of taxation on entry is less often pursued. While a proportional tax with a full loss offset will not affect the entry decision for a risk-neutral individual, a progressive schedule with imperfect loss offsets can discourage entry. We find substantial evidence for this effect on entrepreneurship using variation in tax schedules faced by households in the Panel Study on Income Dynamics (PSID) over the period from 1979 to 1992. While progressive taxation could in principle encourage entry via insurance for risk-averse entrepreneurs through the tax system or through offering greater incentive to avoid taxes on self-employment income, we find no evidence to support such channels. Our empirical results imply a significant increase in entrepreneurial entry when tax rates are less progressive; whether such encouragement is efficient (that is, stimulating the most talented entrepreneurs) is a topic for future research. I. Tax Policy and Entrepreneurial Selection

The Influence of Income Taxes on the Use of Inside and Outside Debt by Small Businesses

We address the effect of taxes on the utilization of inside debt (loans from owners) and outside debt (loans from non-owners) across small businesses organized as taxable corporations and flow-through entities (Subchapter S corporations and partnerships). We contend that the tax incentives to use debt differ according to the type of debt and the type of entity. Consistent with our expectations, regression results indicate that the effect of marginal tax rates on the use of outside debt and substitution with other non-debt tax shields is similar for both taxable and flow-through entities. In contrast, we find that marginal tax rates are positively related to the use of inside debt and substitution for taxable corporations, but are unrelated to the use of inside debt by flow-through entities. This finding is consistent with the use of inside debt by taxable corporations to avoid the double-tax on corporate income that might otherwise be distributed as dividends.

Tax Effects and the Leasing Decisions of Canadian Corporations

AbstractPrevious empirical research has failed to detect tax effects in the leasing decisions of U. S. corporations. This paper extends previous theoretical research to analyse the effect of the tax as well as nontax incentives to lease by Canadian corporations. The empirical research demonstrates that the higher the marginal tax rate of the firm, the lower its degree of leasing. Further, the results show that the tax reform of 1989 affected lease financing in predicted directions.RésuméLes travaux empiriques antérieurs n'ont toujours pas mis en évidence les effets de la fiscalité des entreprises américaines sur leurs décisions de contracter un crédit‐bail (en location simple). La présente étude sur l'effet des incitations fiscales et non fiscales à l'utilisation du crédit‐bail par les entreprises canadiennes s'inscrit dans le prolongement de travaux théoriques. La recherche empirique démontre que cette utilisation est inversement proportionnelle au taux d'imposition marginal de l'en‐treprise, et que les opérations de crédit‐bail ont évolué comme prévu après la réforme fiscale de 1989.

EVIDENCE ON THE EFFECT OF TAXES ON FIRMS' DECISIONS TO RETIRE DEBT EARLY

AbstractWe examine the effect of marginal tax rates on the decision to retire debt early. Other factors that have been linked to the debt retirement decision are also investigated, including leverage adjustment and the value associated with the immediate recognition of a loss for tax purposes on early retirement. Results indicate that firms that retire debt early have lower marginal tax rates than firms that do not retire debt early. This finding is consistent with the proposition that firms are motivated to retire debt early by an incentive to reduce tax shields that cannot be used efficiently. Further, firms that retire debt early are more highly leveraged than firms that do not retire debt early. Evidence also suggests that some firms retire debt early at a loss to reduce currently taxable income.

TAXATION, AGGREGATE ACTIVITY and ECONOMIC GROWTH: FURTHER CROSS‐COUNTRY EVIDENCE ON SOME SUPPLY‐SIDE HYPOTHESES

This paper investigates the effect of marginal tax rates on the level of economic activity. Data from sixty‐three countries for the period 1970‐84 provide support for Koester and Kormendi's method of estimating marginal tax rates for individual countries. However, their conclusion that increases in marginal tax rates have negative effects on the level of economic activity is not robust when we extend the time period from 1970‐79 to 1970‐84. Further, even for Koester and Kormendi's own data set, the negative relation does not hold when the sample is disaggregated into industrial countries and low‐income countries.

TAX RATES AND TAX EVASION: EVIDENCE FROM CALIFORNIA AMNESTY DATA

This paper examines the effect of marginal tax rates on income tax evasion using data from the California Tax Amnesty Program. After correcting for the selectivity bias, we find that evaders respond to higher tax rates by increasing their evasion activity. We also find that individuals with higher levels of income tend to evade more. Further, the absolute and relative sizes of both of these effects depend upon the scope of the evasion measure used. Finally, evasion is generally inelastic with respect to changes in both marginal tax rates and income, with the former elasticities tending to be larger.

Marginal Taxes and the Asset Portfolios of Swedish Households

This paper focuses on the effects of marginal tax rates, wealth, income and a set of socioeconomic and demographic variables on the portfolio composition of households using detailed micro data on 2,000 Swedish households. In particular, efforts are made to disentangle the effects of marginal tax rates on the portfolio behavior of households. Some econometric problems involved when estimating asset demand equations in the presence of incomplete portfolios are briefly discussed. A final section examines the overall effect of marginal tax rates on asset demands by applying estimated discrete and continuous portfolio equations to compute different tax elasticities.

Enforcement Costs and the Optimal Progressivity of Income Taxes

Mirrlees, Sheshinski, Atkinson, Feldstein, Stern, Hellwig, and others have analyzed the balance between redistribution and production of income in setting marginal tax rates. These studies indicated that the trade-off would resolve to optimal marginal tax rates substantially below 100 percent. Recently, attention has turned to the effect of marginal tax rates on evasion (Townsend; Sandmo; Graetz and Wilde; Mookherjee and Png, 1989a; Sanchez and Sobel). In this line of work, a revenue collector can enforce compliance with tax law by expending resources to audit taxpayers' reports. The more progressive the income tax, however, the more tempted will a taxpayer be to evade, and hence the more auditing will be required to

Job Search Duration and Marginal Tax Rates: An Empirical Inquiry

In recent years the impact of taxation on work hours has generated a great deal of research effort. However, the effects of taxes on other dimensions of labor supply have been largely ignored. The purpose of this paper is to investigate an important ignored issue-the effects of tax rates on the duration of job search by those who are unemployed. This issue is one which seems to us of considerable importance in resolving current debates over whether income tax changes will change unemployment. To the extent that changing tax rates affect the benefits and costs of job search such changes may affect the amount of time workers spend searching for jobs which, in turn, will affect unemployment rates. In order to estimate the effects of marginal tax rates on job search duration, we employ a maximum likelihood approach which allows us to take into account the doubly censored nature of our sample. This procedure remedies some of the econometric difficulties of earlier search duration studies. At the same time, it allows direct tests of the marginal contribution of various determinants to the length of search duration. This latter advantage is particularly important since such direct tests are not available in the currently popular re-employment hazard approach to analyzing search duration. The paper proceeds as follows. Section II provides a brief analysis of the theoretical implications of changing tax rates for job search duration. We conclude that the relationship between job search duration and income tax rates is theoretically ambiguous. The question must be addressed empirically. In section III we present our empirical methodology for addressing the question and compare it to approaches taken in prior search duration analyses. Our data and our empirical results are discussed in section IV. Section V contains our conclusions.

Personal Income Taxes in Developing Countries

Comparative work on income taxes in developing countries has commonly looked at average tax rates. These rates are often constructed by dividing revenue collections by some measure of private or personal income. Recent controversies have, however, focused on the incentive effects of marginal tax rates. This article develops and applies a simple methodology to compare marginal official tax rates across a sample of fifty developing countries. As would be expected given differences in fiscal capacity, the poorest and the lower-middle-income countries impose relatively low marginal rates, and the rates for the upper-middle-income and developed countries are higher. Conversely, several low and lower-middle income countries' tax thresholds start at income levels which are low relative to their mean income when compared with those of developed countries. The results warn against trying to derive information on the disincentive effect of a country's tax schedule from the highest marginal rate; the authors' data show that this is not an accurate indicator of overall disincentive effects.