Expected Tax Rate Research Articles

Loss expectation and income shifting

This study examines the effects of expected losses on the income-shifting strategies of multinational corporations (MNCs). Using a set of worldwide MNC affiliates, this study first finds empirical evidence for ex ante adjustments of income-shifting strategies according to reverse incentives for potential losses. The results also support the existence of limited flexibility introduced by Hopland et al. (2018, 2021). Second, the estimates of income shifting measured using expected tax rate differences reveal that the traditional methodology of using statutory tax rate differences is subject to an estimation bias. This estimation bias varies depending on the loss expectation status and tax-rate levels of the affiliates.

Loss Expectation and Income Shifting

This study examines the effects of expected losses on income shifting from various perspectives. Using a set of worldwide multinational corporation (MNC) affiliates, this study first finds empirical evidence of ex ante adjustments of income-shifting strategies by affiliates, supporting the existence of limited flexibility introduced in Hopland et al. (2018, 2019). The study next identifies that loss-expecting affiliates with limited loss carry-forward periods have greater reverse incentives for income shifting than those with unlimited periods because the former must utilize potential losses within a limited period of time. Lastly, according to measurements of the magnitude of income shifting based on expected tax rate differences using the full sample of both profitable and loss affiliates, the methodology applied in traditional studies is found to overestimate the magnitude of income shifting.

Political Representation and Legislative Bargaining over Redistribution

The theories of dynamic legislative bargaining have supposed that the distribution of legislators are constant across periods. In reality, a transition in the economic condition makes people change the candidate they vote for and politicians alter their opinions. Regarding the redistribution and inequality issue, a redistribution policy affects the future legislators’ policy preferences via influencing the economic inequality among the people. This paper recognizes such a feedback effect and investigates its effect on the outcomes in the legislature. This finding suggests that a high political representation causes a high capital accumulation associated with a low expected tax rate. Socially efficient allocation can be reached only if the political representation is perfect.

Does Corporate Tax Avoidance Influence Firm Leverage of Vietnamese Listed Companies?

Corporate tax avoidance is defined by reducing taxes for any particular purpose, extending from the gracious remission of taxes expense arising from inconsistent customs for financial statements. In this paper, we examine the association between corporate tax avoidance and firm leverage. The trade-off theory is significant for explaining the relationship between tax avoidance behaviour and firm leverage. Consequently, the company directs to allow tax avoidance behaviour and accept the company’s leverage at a higher level than usual. The consequences commence to transaction costs, financial risks when viewing at company health from financial statements, but will maintain the company achieves the expected tax rates. We utilize STATA to test GMM on a sample of Vietnam listed firms data over the period 2010-2016. The sample data of 125 companies in the period from 2010 to 2016, all 875 observations were used for the analysis. The results show that there is a significant positive relationship between corporate tax avoidance on firm leverage in Vietnam. The research is essential to the regulator in controlling tax costs for companies, for investors in analyzing a corporate financial situation.

Taxation of firms with unknown mobility

AbstractWe analyze optimal business tax policy when some firms are able to escape taxation by moving abroad. In contrast to the existing literature, we assume that the true number of mobile firms is ex ante unknown. While the government may learn from the firms' location responses to past tax rate changes, firms may anticipate this and adjust their choices accordingly. We find that incomplete information on mobility substantially affects the properties and the implications of equilibrium policy choices. First, the government may find it optimal to set a tax rate that triggers partial firm migration but full revelation of the true number of mobile firms. Second, we show that, if the firms' outside option is attractive (i.e., relocation cost and foreign tax rates are low), expected tax rates and expected firm migration are higher if the degree of mobility is unknown. Third, there is a positive value of learning, i.e., commitment on future tax rates cannot increase the government's expected revenue. However, if the government can commit to a rule‐based learning mechanism, i.e., credibly tie its future tax policy to present policy outcomes, it may obtain a Pareto improvement.

The Relative Effects of Economic and Non-Economic Factors on Taxpayers' Preferences between Front-Loaded and Back-Loaded Retirement Savings Plans

To understand the potential impact of tax incentives on individual retirement saving, we must understand how individuals make decisions about saving. We examine individual taxpayers’ choices between front-loaded (e.g., traditional) and back-loaded (e.g., Roth) defined contribution retirement savings plans, as well as their saving levels and investment style choices within a plan. To do so, we conduct a series of experiments that allow us to consider individual-specific expectations regarding the economic factors that normatively drive retirement saving decisions, as well as non-economic attitudes and preferences that may also impact these decisions. Overall, we find that participants generally prefer back-loaded retirement plans to front-loaded plans. We find mixed evidence regarding whether individuals appropriately weight expected tax rate changes in their plan choices, despite the fact that these tax rate changes are the primary factor driving the relative after-tax returns of front- and back-loaded plans. Conversely, we find evidence that plan attributes related to individuals’ non-economic attitudes and preferences consistently influence plan choice. Saving levels, while idiosyncratic and difficult to predict, are negatively associated with preference for back-loaded plans and may be influenced by tax-related contextual variables as well. Investment risk is also negatively associated with preferences for back-loaded plans.

The consequences of an unknown debt target

Several proposals to reduce U.S. debt reveal large differences in their targets. We examine how an unknown debt target affects economic activity using a real business cycle model in which Bayesian households learn about a state-dependent debt target in an endogenous tax rule. Recent papers use stochastic volatility shocks to study fiscal uncertainty. In our setup, the fiscal rule is time-varying due to unknown changes in the debt target. Households infer the current debt target from a noisy tax rule and jointly estimate the transition probabilities. Three key findings emerge from our analysis: (1) limited information about the debt target amplifies the effect of tax shocks through changes in expected tax rates; (2) the welfare losses are an order of magnitude larger when both the debt target state and transition matrix are unknown than when only the debt target state is unknown to households; (3) an unknown debt target likely reduced the stimulative effect of the ARRA and uncertainty about the sunset provision in the Bush tax cuts may have slowed the recovery and led to welfare losses.

A teaching note on the tax benefits of retirement savings

Abstract Typical textbook treatments of tax-advantaged retirement savings plans focus on legalistic characteristics such as contribution limits and early withdrawal penalties. Popular press articles on these plans often present a myriad of details on the effects of inflation, rates of return, expected tax rates, ordinary income versus capital gains treatment, and other items that tend to obscure their fundamental tax advantages. The goal of this teaching note is to expose the fundamental tax advantages of retirement savings plans by conducting an analysis of a simplified tax setting. We identify four interrelated benefits of existing retirement plans – tax-deferred contributions, tax-deferred earnings, never-taxed earnings, and income smoothing with progressive tax rates. We also provide a more in-depth analysis of the choice between the two most popular forms of retirement savings, traditional and Roth accounts. An understanding of the properties of the tax benefits of retirement savings can be useful for students who are preparing for careers as tax professionals, as well as individuals who wish to understand the financial planning advice they receive.

Estimating the Elasticity of Taxable Income in New Zealand

This paper produces regression estimates of the elasticity of taxable income in New Zealand using two new instruments applied to a substantial tax reform ‘experiment’. Instrumental variable methods are required to deal with endogeneity of the tax rate and taxable income in a non‐linear tax structure. However, in the New Zealand context, the ‘standard’ regression instrument is found to be unable to accommodate the substantial observed exogenous (non‐tax‐induced) changes in taxable income. Two new tax rate instruments are proposed, which use information on taxable income dynamics, for a panel of taxpayers over a period that involves no tax changes, to derive taxpayers’ counterfactual post‐reform incomes and tax rates expected in the absence of reform. The two instruments respectively measure, for each taxpayer, the tax rate associated with expected mean income, and the expected tax rate associated with the individual's expected conditional distribution of income. Applying these instruments to the 2001 New Zealand tax changes yields plausible estimates of the elasticity of taxable income around 0.5–0.7. Elasticities are found to be substantially higher for taxpayers with non‐wage‐and‐salary income compared with wage and salary only taxpayers. Results also confirm that non‐wage‐and‐salary income was especially responsive to the tax changes.

A Teaching Note on the Tax Benefits of Retirement Savings

Typical textbook treatments of tax-advantaged retirement savings focus on legalistic characteristics such as contribution limits and early withdrawal penalties. Popular press articles often present a myriad of details on the effects of inflation, rates of return, expected tax rates, ordinary income versus capital gains treatment, and other items that tend to obscure the basic properties of the tax advantage. The goal of this teaching note is to provide economic intuition by undertaking a fundamental examination of the properties of the tax benefits of retirement savings. We identify four (interacting) benefits of existing retirement plans - tax-deferred contributions, tax-deferred earnings, never-taxed earnings, and income smoothing with progressive tax rates. We also analyze a “location problem”, which arises when an employee wants to save more than the amount eligible for tax-advantaged status. An understanding of the properties of the tax benefits of retirement savings can be useful for students who are preparing for careers as tax professionals, as well as individuals who wish to understand the financial planning advice they receive.

The Consequences of Uncertain Debt Targets

Several proposals to reduce U.S. debt reveal large differences in their targets. We examine how an unknown debt target affects economic activity using a real business cycle model in which Bayesian households learn about a state-dependent debt target in an endogenous tax rule. Recent papers use stochastic volatility shocks to study fiscal uncertainty. In our setup, the fiscal rule is time-varying due to unknown changes in the debt target. Households infer the current debt target from a noisy tax rule and jointly estimate the transition probabilities. Three key findings emerge from our analysis: (1) Limited information about the debt target amplifies the effect of tax shocks through changes in expected tax rates; (2) The welfare losses are an order of magnitude larger when both the debt target state and transition matrix are unknown than when only the debt target state is unknown to households; (3) An unknown debt target likely reduced the stimulative effect of the ARRA and uncertainty about the sunset provision in the Bush tax cuts may have slowed the recovery and led to welfare losses.

Regression Estimates of the Elasticity of Taxable Income and the Choice of Instrument

This paper examines estimation of the elasticity of taxable income using instrumental variable regression methods. It is argued that the ‘standard instrument’ for the net-of-tax rate − the rate that would be applicable post-reform but with unchanged income levels − is unsatisfactory in contexts where there are substantial exogenous changes in taxable income. Two alternative tax rate instruments are proposed, using estimates of the dynamics of taxable income for a panel of taxpayers over a period that involves no tax changes. The parameters derived from this procedure are then used to construct hypothetical (or counterfactual) post-reform incomes that would be expected in the absence of reform. The first method is based on the tax rate each individual would face if income were equal to ‘expected income’, conditional on income in two periods before the tax change. The second alternative uses the form of the conditional distribution of income for each taxpayer to obtain an instrument based on the ‘expected tax rate’. The methods are applied to the tax change in New Zealand in 2001.

Taxation of Firms with Unknown Mobility

We analyze the optimal tax choices of a revenue-maximizing government that levies taxes from firms of which the true degree of mobility is ex ante unknown. Differential tax treatment of immobile and mobile firms is ruled out, but the government may learn from the firms’ location responses to past tax rate changes. Firms, however, may anticipate this and adjust their choices accordingly. We derive all symmetric Bayesian equilibria with a focus on the (so far neglected) one where the government sets a tax rate that triggers partial migration but full revelation of the true number of mobile firms. We show that, if tax competition is fierce (i.e., relocation cost and foreign tax rates are low), expected tax rates and expected firm migration are higher if the degree of mobility is unknown. There is a positive value of learning, i.e. commitment on future tax rates cannot increase the government’s expected revenue. However, if the government can commit to a rule-based learning mechanism, i.e. credibly tie its future tax policy to present policy outcomes, it may obtain a Pareto improvement.

Indeterminacy, underground activities and tax evasion

This paper introduces underground activities and tax evasion into a one-sector dynamic general equilibrium model with aggregate external effects. The model presents a novel mechanism driving the self-fulfilling prophecies, which is characterized by well behaved (downward sloping) labor demand schedules. This mechanism differs from the customary one, and it is complementary to it. Compared to traditional labor market income, the income derived from underground labor activity is subject to a lower expected tax rate when considering both the probability of detection and the evasion penalty. During a belief-driven expansion, the household allocates more time to both traditional and underground labor supply. In equilibrium, this action serves to lower the effective labor tax rate faced by the household, thus providing stimulus to aggregate labor supply so as to make the initial expansion self-fulfilling. The mechanism here is akin to a “regressive tax”; the household's effective tax rate depends negatively on the level of total labor income. We argue that an underground sector, and the associated tax evasion, offer a good economic rationale for a regressive tax rate.

The Relationship between Government Financial Condition and Expected Tax Rates Reflected in Municipal Bond Yields

Yields on long-term municipal bonds reflect both current and expected future tax rates. This paper derives expected changes in tax rates from yields on short- and long-term municipal bonds and examines the relationship between expected changes in tax rates and the financial condition of the federal government between 1965 and 1994. The main empirical result is that a positive relationship exists between the expected tax rate and federal debt. Inflation also positively affects the expected tax rate, suggesting that investors may expect tight fiscal policies when inflation is high. Qualitative results are similar across specifications, estimators, and sample periods.

Measuring Effective Tax Rates on Risky Assets

In the economic literature the fiscal burden on financial claims is usually measured by the expected tax rate. Auerbach has demonstrated that the use of this method can be seriously misleading. This paper develops a method for defining an effective tax rate adjusted for risk on uncertain financial claims. This Effective Tax rate is then applied for evaluating different kinds of tax systems.

Voluntary Debt Reduction: Incentives and Welfare

In an economy with a debt overhang, investment depends on expected tax rates, but expected tax rates depend on the debt's face value. Therefore investment depends on the face value of debt. This relationship may lead to a positive or negative association between debt and investment. The paper explores the desirability of debt reduction. First, it characterizes circumstances in which debt reduction is desirable from the collective point of view of the creditors. Second, it formulates the forgiveness decision as a noncooperative game among creditors and explores the scope for debt reduction as an outcome of this game.

Voluntary Debt Reduction: Incentives and Welfare

In an economy with a debt overhang, investment depends on expected tax rates. On the other hand, expected tax rates depend on the debt's face value. Therefore investment depends on the face value of debt. I show that this may lead to a positive or negative association between debt and investment depending on the degree of international capital mobility and attitudes toward risk. There may also exist multiple equilibria; with high and low investment levels. The paper explores the desirability of debt reduction in this environment. First, it characterizes circumstances in which debt reduction is desirable from the collective point of view of the creditors. Second, it formulates the forgiveness decision as a noncooperative game among creditors and explores the scope for debt reduction as an outcome of this game.

Monetary and Public Debt Shocks: Tests and Efficient Estimates

IN AN ARTICLE IN THE JMCB, Barro [1] defined a form of intertemporal efficiency for the behavior of marginal tax rates (and expected tax rates). Given certain additional conditions on government expenditures, Barro's definition of efficiency implied that particular relationships and time paths would characterize federal deficits. In that paper, two of the seven predicted relationships were tested: (1) the sign of the relationship between the deficit and the ratio of output to its trend value, and (2) the effect of anticipated inflation on the deficit. Those tests were performed under the joint assumptions of the rational expectations hypothesis (REH) and predictable policy irrelevance (or structural neutrality (SN)) with regard to both monetary and debt policies. In this paper, Barro's tests of the efficiency hypothesis are reexamined within a wider context by means of the statistically efficient full information maximum likelihood (FIML) method [4 6].1 Specifically, by allowing the imposition of cross-equation and within-equation parameter constraints, the FIML method makes it possible to: (a) directly test the REH and SN propositions (jointly and separately