Exemption Threshold Research Articles

Information frictions and learning dynamics: evidence from tax bunching in Ecuador

AbstractWe examine how taxpayers learn to minimize personal income tax payments in the context of a rapidly formalizing economy with an expanding tax base. Initially, take‐up of possible generous tax deductions is low among taxpayers in Ecuador who start working in the formal sector. With increasing duration of employment, however, taxpayers become more likely to bunch at the tax exemption threshold using deductions. We exploit rich administrative data on the universe of taxpayers in Ecuador and an event study design to provide causal evidence on the learning mechanisms. We find that the spread of information is driven by the mobility of workers and tax preparers across firms.

Top incomes and tax policy

Abstract Modern tax systems do not satisfactorily tax the wealthiest individuals. Meanwhile, government revenue needs have increased in the wake of the COVID-19 pandemic. This paper discusses ideas for new revenue sources focused on the top of the distribution: A progressive tax on net wealth with a high exemption threshold, a wealth tax on corporations' stock and a one-off tax on top-end unrealized capital gains. Given the size and concentration of wealth, the revenue potential of these policies is significant.

МІЖНАРОДНИЙ ДОСВІД РЕФОРМУВАННЯ СИСТЕМИ ОПОДАТКУВАННЯ ДОХОДІВ У ПОСТПАНДЕМІЧНИЙ І ВОЄННИЙ ПЕРІОДИ

Узагальнено міжнародний досвід реформування систем оподаткування доходів у воєнних і поствоєнних умовах, зокрема, проведено порівняння підходів до реформування систем оподаткування доходів у США, Швеції, Данії, Франції і Великій Британії. Розглянуто приклади, які демонструють, що, попри той факт, що податки на багатство в багатьох країнах Європи і світу характеризувалися низькою бюджетною ефективністю (не приносили значних бюджетних надходжень і при цьому вимагали суттєвих адміністративних витрат), тактика оподаткування надприбутків широко практикувалася тривалий час навіть після закінчення війни, зокрема, у постпандемічний період і в умовах сучасної енергетичної кризи в країнах ЄС.Систематизовано основні погляди на оподаткування багатства фізичних осіб – не стільки як загрози відпливу капіталу і дестимулювання капіталовкладень, скільки як важливої складової податкової системи, що в поєднанні з іншими податками на доходи і майно сприяє відновленню рівномірності розподілу багатства і мінімізує можливості для податкових ухилень. Акцентовано увагу на застосуванні країнами ЄС податку на надприбутки як солідарного одноразового загальноєвропейського податку у відповідь на глобальну соціально-економічну кризу, спричинену негативними наслідками пандемії COVID-19 і зростанням цін на енергоносії через воєнну агресію РФ. Обґрунтовано ключові вимоги, яким має відповідати податок на багатство фізичних осіб, для його запровадження в Україні, що передбачає встановлення неоподатковуваного мінімуму на високому рівні, а також його поширення не лише на резидентів України, а й на громадян інших країн, що володіють активами на її території, з метою підвищення його прогресивності й бюджетної ефективності.

Tax progressivity and taxing the rich in developing countries: lessons from Latin America.

This article discusses the challenges and potential policy choices for levying progressive taxes and taxing the rich in Latin America, a region known for its high-income inequality, limited tax-collection capacity, and low share of taxes collected from personal income and wealth. Factors such as high exemption thresholds, low top marginal tax rates, and limited administrative capacity undermine the redistributive ability and revenue collection of the tax systems in the region. Moreover, the income composition for the top percentiles largely comes from capital, and the effective tax rates they face are often low due to the preferential treatment of capital income and wealth. After discussing the evidence of how the rich in Latin America respond to progressive taxes on income and wealth and changes in enforcement policy, we provide some insights on potential policy choices to tax them effectively. These may include broadening the income tax base by lowering the number of exempt and non-taxable income items and the statutory exemption thresholds, reevaluating preferential tax rates on capital income, monitoring foreign income, addressing the abuse of tax treatment by business earners, and enhancing tax administration capacity. Additionally, wealth taxes may complement the tax system with updates to property registers and scrutiny of foreign assets.

Introducing electronic transaction levy in Ghana: A possible curse or a blessing? The public’s perception

This study seeks to determine Ghanaians’ perceptions of the new electronic transaction levy (E-levy) and the impact of their perception on their intention to use electronic transactions (ETs) that attract the levy, financial inclusion (FI) and financial well-being (FW). To achieve this, the study employs PLS-SEM with a sample size of 782. Generally, we found Ghanaians have limited knowledge on E-levy. Thus, Ghanaians should be re-educated about E-levy. We again document that the perception of Ghanaians towards E-levy is negative. Also, we found most Ghanaians intend to reduce their patronage of ETs that attract levy. Furthermore, Ghanaians’ perception of the E-levy reduces their intention to use ETs that are affected by the levy and, by extension, adversely affect FI and FW. Hence, based on the perception of Ghanaians, the E-levy introduced is a curse. We recommend that the government of Ghana review the E-levy policy to minimize its negative effects. We specifically suggest that government raise the GH¢100 per day transaction exemption threshold to increase the intention to use ETs and FI; moreover, government can exempt businesses that pay income tax from E-levy to reduce the tax burden on their income. Also, government should re-enlighten the public on the benefits of E-levy to the country, reassuring the public of accountability and honesty in implementing the E-levy policy to increase their intention to patronize ETs that attract levy. Again, we record a significant and positive total effect of FI on FW. Thus, additionally, government should introduce policies that ensure FI.

Tax Policy, Corruption and Poverty in WAEMU

The aim of this paper is to demonstrate that a tax policy designed for taxes for social purposes reduces poverty in the West African Economic and Monetary Union. Poverty reduction requires optimal taxation, reduction of corruption, and improvement of the final consumption level per inhabitant. In order to reach this conclusion, we used panel data from the period 1996 to 2019. We used a method based on ‘panel-corrected standard errors corrected’ (PCSE). The paper suggests that public officials should establish proper tax policies and effective social protection programmes, and ensure good tax governance. Mainly, authorities can establish tax exemption thresholds for the poor, increase tax rates on the highest incomes, and ensure good tax governance.

Nonlinear redistribution of wealth from a stochastic approach

We investigate the effect of applying nonlinear redistributive taxes to the yard-sale dynamics of assets. An amount of money is collected from each individual (tax) and distributed back equally. We consider (i) a piecewise linear tax, exempting those with wealth below a threshold w0, and taxing the excess wealth otherwise, and (ii) a power-law tax with exponent α>0, which allows embracing regressive, proportional and progressive rules. The distribution of wealth obtained from numerical simulations of the agent-based dynamics is compared with the solution of its associated Fokker–Planck equation for the probability density function P(w,t) of wealth w at time t, in good agreement. Based on these solutions, we analyze how the different rules modify the distribution of wealth across the population, quantifying the level of inequality through the Gini coefficient. We note that the introduction of an exemption threshold does not always diminish inequality, depending on the implementation details. Moreover, nonlinearity brings new stylized facts in the distribution of wealth compared to the linear case, e.g., negative skewness, bimodality, indicating stratification, or a flat shape meaning equality populated wealth layers.

From each according to means, to each according to needs? Distributional effects of abolishing asset-based payments for residential care in Austria

BackgroundMost countries in Europe require out-of-pocket payments (OPPs) for nursing homes based on users’ income and often assets. This was also the case in Austria until 2018 when asset-based contributions to residential care —denoted the ‘Pflegeregress’ – were abolished, leaving a shortfall in revenue. We aim to determine how the Pflegeregress was distributed across different groups in Austria prior to 2018, what the distributional consequences of its abolishment were, and what the distributional impact of different financing alternatives would be.MethodsCircumventing data availability issues, we construct a micro-simulation model using a matched administrative dataset on residential care users receiving the Austrian care allowance (Pflegegeldinformation, PFIF, HVB, and Pflegedienstleistungsstatistik, Statistik Austria) and survey data (SHARE, wave 6). Using this model, we estimate the expected duration of residential care and OPPs under the Pflegeregress of a representative sample of older people aged 65 + in Austria, as well as OPPs under budgetary neutral financing alternatives to the abolished asset-based contribution, namely an inheritance tax and a social insurance scheme. The distributional impact of abolishing the Pflegeregress and these alternative scenarios is assessed through a number of measures, such as ability to pay, Concentration Indices (CI) and a needs-standardized measure.ResultsWe find that lower income individuals and homeowners disproportionately contributed to asset-based OPPs for residential care prior to 2018, due in large part to their higher use of residential care and the low asset-exemption thresholds. These groups were therefore the largest beneficiaries of its abolishment. The alternative financing scenarios tested would result in a more progressive distribution of payments (i.e. concentrated on more affluent individuals).ConclusionOur findings indicate the limited ability of asset-based OPPs to target those with higher assets, thus questioning the fairness of these instruments for financing residential care facilities for older people in Austria. Findings also suggest that the parameterization of such OPPs (such as asset exemption thresholds) and patterns of residential care use are key variables for assessing the distribution of asset-based OPPs for residential care use. Policy alternatives that decouple payments from use would entail greater transfers from healthy to less healthier individuals.

Council

This overview highlights the Council’s (i) Code of Conduct Group agreement on a Work Program under the French Presidency, (ii) authorization to Hungary to continue to apply a higher exemption threshold for small businesses, (iii) authorization to France to introduce mandatory electronic invoicing in 2024, and (iv) authorization to Belgium to continue to apply the exemption threshold for small businesses.

The Economic Consequences of Financial Audit Regulation in the Charitable Sector

ABSTRACTI provide evidence on the effects of financial audit mandates in the charitable sector, in particular their influence on donor behavior. My empirical strategy relies on variation in size‐based exemption thresholds across states and differences in size driven by the nature of charities’ activities. Consistent with audit mandates reducing donors’ reliance on charity reputation, I find audit mandates are associated with a lower concentration of donations on the largest, most well‐known charities. I show this reallocation of resources allows the charitable sector to serve more diverse geographic areas and social needs. In terms of the effect on willingness to give, I document that audit mandates are associated with a higher proportion of taxpayers who donate. However, I only observe a sizable impact on total contributions in dollars for charities with high inherent information asymmetry. Collectively, these results suggest financial audit regulation reduces information frictions and thereby affects resource allocation in the market for charitable giving.

Employment Structure and the Rise of the Modern Tax System

This paper studies how the transition from self-employment to employee-jobs over the long run of development explains growth in income tax capacity. I construct a new database which covers 100 household surveys across countries at different income levels and 140 years of historical data within the US (1870-2010). Using these data, I first establish four new stylized facts: 1) within country, the share of employees increases over the income distribution, and increases at all levels of income as a country develops; 2) the income tax exemption threshold moves down the income distribution as a country develops, tracking employee growth; 3) the employee share above the tax exemption threshold is maximized and remains constantly high; 4) movements in the tax exemption threshold account for the observed variation in tax collection across development. These findings are consistent with a model where a high employee share is a necessary condition for effective taxation and where the rise in income covered by information trails through increases in employee shares drives expansion of the income tax base. To provide a causal estimate of the impact of employee share on the exemption threshold, I study a state-led US development program implemented in the 1950s-60s which shifted up the level of employee share. The identification strategy exploits within-state changes in court-litigation status which generates quasi-experimental variation in the effective implementation date of the program. I find that the exogenous increase in employee share is associated with an expansion of the state income tax base and an increase in state income tax revenue.

Employment Structure and the Rise of the Modern Tax System

This paper builds a new microdatabase that covers 100 countries at all income levels and long-run time series in the United States (1870–2010) and Mexico ( 1960–2010) to document how the modern tax system arises over development. I establish a new set of stylized facts, which show that the income tax exemption threshold decreases in the income distribution as a country develops, tracking growth in the employee share of employment that occurs gradually further down the income distribution. Additional evidence supports the interpretation that the rise in third-party covered income through increases in employee share drives expansions of the income tax base over development. (JEL D31, H23, H24, H71, J22, J23, N40)

Should Inheritance Be Taxed as Income?

Many have advocated the taxation of bequests and gifts as income in order to achieve substantial revenues from unearned wealth and address inequality. There are, though, many drawbacks to the idea of taxing inheritance as part of the beneficiary’s income. Even for those who claim the inclusion of inherited wealth in the beneficiary’s income tax base, the features of the current taxes on gratuitous transfers should be retained. High tax exemption thresholds, annual exemptions for small gifts, medical expenses and transfers to spouses, tax deferral for illiquid assets and so forth would continue to apply to inherited wealth, notwithstanding their inclusion in the income tax base. In the author’s opinion, the foregoing is a serious argument against including inheritances in the concept of taxable income. The special treatment to be accorded to inherited wealth, as compared to other taxable income, undermines the belief that legacies should be imposed as income, since it signals that they are inherently different. Inheritance is certainly suitable grounds for taxation, but it seems more appropriate to continue taxing it as part of an autonomous levy, without yielding to suggestions that it be included in the income tax base.

Income tax progressivity and inflation during the world wars

AbstractThis paper studies the impact of inflation on income taxes in Sweden, the UK, and the United States during the world wars. As tax reforms were rising top marginal rates and reducing exemption thresholds, extraordinary levels of inflation eroded the real value of exemptions, brackets, and deductions. The micro-simulation of actual and alternative scenarios shows that inflation made the tax less progressive, particularly in Sweden during World War I and the UK during World War II. Nevertheless, its redistributive effect increased due to the related growth in tax revenue. Inflation contributed to transform a “class tax’’ into a “mass tax”.

An examination of comment letters concerning an increase in audit exemption thresholds. Evidence from Finland

ABSTRACT This study examines how interest groups have reacted to the suggested increase in the audit exemption thresholds in Finland. The results suggest that the lobbying opponents objected to the increase because of the benefits gained from the auditing of financial statements. Considerable reliance is placed on the audited accounts of Finnish small firms in maintaining societal functionality. Hence, the results are supported by the public interest theory. In contrast, the comment letters that supported the increase highlighted the need to follow international trends. The findings of the lobbying behaviour suggest that the interest groups collected information and strategically transferred it to the ministry with the objective of influencing the regulatory outcome. To conclude, this study contributes to a more detailed understanding of the role that the key arguments both for and against the proposed regulatory change played in the case of increasing the audit exemption thresholds. Finally, this study joins existing lobbying literature and contributes to this stream of research by shedding light on the importance of the argumentation strategies used in the Finnish case.

A case study review and reasonability assessment of the foreign employment income tax exemption threshold in section 10(1)(o)(ii) of the Income Tax Act

This research paper, by means of a case study, evaluated whether the foreign employment income tax exemption threshold in section 10(1)(o)(ii) of the Income Tax Act achieved its objectives: first, limiting the impact of the amendment to the exemption in respect of South African tax residents earning low or moderate levels of remuneration in either the United Arab Emirates (low-income tax rate jurisdiction) or the United Kingdom (high-income tax rate jurisdiction); and, second, spared tax residents earning remuneration in the United Kingdom of making additional ‘top-up’ tax payments to the South African Revenue Service. The case study assessed the tax position of a South African tax resident earning low, moderate or high levels of foreign remuneration in either the United Arab Emirates or United Kingdom, based on three mutually exclusive assumptions: first, had the full exemption continued to apply (as was effective on 29 February 2020); second, had the exemption threshold applied (effective from 1 March 2020, in terms of the 2020 Budget Review; not yet legislated at the time of writing the research paper); and, third, had the exemption, in full, been repealed (as proposed in terms of the Draft Taxation Laws Amendment Bill of 2017). The reasonability of the current threshold value was assessed by comparing it to the minimum threshold value required to achieve a break-even tax position in the Republic.

Adjustment cost and incentives to work: Evidence from a disability insurance program

How important is adjustment cost for individuals who face a change in work incentives induced by a policy change? I provide the first estimate of adjustment cost in the context of a Disability Insurance (DI) program by exploiting a policy change that increased work incentives by increasing the exemption threshold. I use bunching at the thresholds to estimate adjustment cost and earnings elasticity. The estimates of adjustment cost are quite sizeable and heterogeneous. The estimates of earnings elasticity, from both static and dynamic models, are larger than the elasticity estimated with no adjustment cost, suggesting that adjustment cost attenuates the responses to work incentives. Policies designed to increase labor supply will work if the work incentives are large enough to offset the adjustment cost. Accounting for adjustment cost then might explain the disparate findings on the effects of an increase in work incentives on the labor supply of beneficiaries of DI programs.

On the Negatives of Negative Interest Rates and the Positives of Exemption Thresholds

Major central banks remunerate reserves at negative interest rates and it is increasingly likely that they will keep rates negative for many more years. To study the long run implications of negative rates, we construct a dynamic general equilibrium model with commercial banks funding investment projects and a central bank issuing reserves. Negative rates distort investment decisions resulting in lower output and welfare. These findings sharply contrast the short-run expansionary effects ascribed to negative rate policies by most of the existing literature. Negative rates also reduce commercial bank profitability. Exempting a fraction of reserves from negative rates can resolve profitability concerns without affecting the central bank's ability to control the money market rate. However, exemption thresholds do no mitigate the investment distortions created by negative rates.

The Labor Market Effects of Expanding Overtime Coverage

This paper studies the employment and income effects of a federal proposal in 2016 to expand overtime coverage to additionally cover salaried workers earning between $455 and $913 per week ($23,660 and $47,476 per annum). Although the policy was unexpectedly nullified a week before its proposed effective date, using detailed administrative payroll data covering one-sixth of the U.S. workforce, I find clear evidence that firms nevertheless responded to the policy by bunching workers' earnings at the new $913 exemption threshold. On average, the base salary of directly affected workers who remain employed increased by 1.4%. Meanwhile, for every hundred workers who would have gained coverage under the policy, 10 jobs were reclassified from salaried to hourly. Preliminary analysis also suggests that there may have been negative employment effects. Examining the distribution of these margins of adjustments, I find that the positive income effect accrued entirely to workers who were bunched at the $913 threshold but would otherwise have earned between $720 and $913 per week, whereas the reclassification and negative employment effects were spread across jobs paying within the entire range of newly covered base salaries.

Stealth Consolidation: Evidence from an Amendment to the Hart-Scott-Rodino Act

Prospective merger review is the most frequent application of antitrust law. It exempts transactions on the basis of size, though small deals can have large anticompetitive effects in segmented industries. I examine its impact on antitrust enforcement and merger activity in the context of an abrupt increase in the US exemption threshold. I find that among newly-exempt deals, antitrust investigations fall to almost zero while mergers between competitors rise sharply. Effectively all of the rise reflects an endogenous response of firms to reduced premerger scrutiny, consistent with large deterrent effects of antitrust enforcement. (JEL G34, G38, K21, L41)