Explicit Tax Research Articles

An Error in the Theory of Seigniorage

The article reveals an error in the theory of seigniorage or government revenue from printing money. Friedman, Cagan, Mankiw, and other economists have repeated the definition of seigniorage as the monetary base multiplied by the rate of inflation (or by the growth in the monetary base). This definition, however, contains a logical error in the formula of seigniorage, confusing the growth rate with the growth rate divided by the growth rate plus one. This often-repeated confusion is consequently common in modern economics textbooks. These many authors have omitted Keynes who – almost one hundred years ago – rightly understood seigniorage to be the monetary base multiplied by the rate of money growth divided by the rate of money growth plus one. This paper presents an unambiguous definition and formula of seigniorage and offers a graphical illustration of seigniorage as a function of monetary growth which corresponds to Keynes’s approach. It is shown that such a graph is an analogy to the Laffer curve in explicit taxation.

The impact of corporate governance on implicit taxes

Implicit taxes reduce the pre-tax return rate due to investment tax preferences, contrasting with direct, explicit taxes paid to the government. This paper explores implicit taxes in Brazilian publicly traded firms within the differentiated Corporate Governance segments of [B]3 from 2011 to 2021. Using a focused methodology that tests two hypotheses, the study demonstrates that firms in these segments bear a higher implicit tax burden and have their explicit tax benefits supplanted by implicit ones. Results specifically reveal that companies in differentiated segments experience lower pre-tax investment returns than others, pointing to weakened tax management levels. This concise analysis underscores the complex relationship between implicit and explicit taxes and corporate governance practices, necessitating further research for comprehensive understanding.

The impact of corporate governance on implicit taxes

Implicit taxes reduce the pre-tax return rate due to investment tax preferences, contrasting with direct, explicit taxes paid to the government. This paper explores implicit taxes in Brazilian publicly traded firms within the differentiated Corporate Governance segments of [B]3 from 2011 to 2021. Using a focused methodology that tests two hypotheses, the study demonstrates that firms in these segments bear a higher implicit tax burden and have their explicit tax benefits supplanted by implicit ones. Results specifically reveal that companies in differentiated segments experience lower pre-tax investment returns than others, pointing to weakened tax management levels. This concise analysis underscores the complex relationship between implicit and explicit taxes and corporate governance practices, necessitating further research for comprehensive understanding.

Implicit Tax, Tax Incidence, and Pretax Returns

ABSTRACTWe investigate the relation between tax rates and pretax returns by showing how implicit tax, tax incidence, and tax capitalization change in response to a tax rate change. We examine these issues in the context of both financial assets and real investments made by corporations in a competitive equilibrium in which all investments earn the same after-tax rate of return. Results show that the pretax return increases in the statutory tax rate due to an explicit tax rate effect and decreases due to a cost of capital effect; the net effect is ambiguous. In contrast, the implicit tax rate is weakly increasing in the statutory tax rate. We also relate our findings to the empirical literature on the effects of taxes on pretax returns.JEL Classifications: H22; H25.

Gender Equality and Taxation from the Rwandan Perspective

Gender equality has attracted the attention of scholars and politicians around the world. The interest in writing about gender equality and taxation in Rwanda stems from the fact that Rwanda is seen as a country that is progressive in protecting and promoting women's rights based on the principle of gender equality. Although it is at the centre of debates worldwide, there are few academic analyses that link the principle of gender equality to taxation. This shortcoming is particularly true for developing countries, of which Rwanda is one. This paper therefore identifies the explicit and implicit gender biases in the Rwandan tax system. In doing so, it shows that Rwanda, like other modern and democratic states, has taken an important step towards eliminating explicit tax gender discrimination. However, it also highlights some grey areas that need to be addressed in order for Rwanda to remain free from implicit gender-based tax biases.

Economic Problems with Subsidies for Electric Vehicles

The use of motor vehicles in Australia generates external costs. The external costs are associated with government expenditure on road infrastructure, traffic congestion and road accidents as well as pollution. A subsidy for electric vehicles will reduce the pollution external cost, and more so as the share of electricity generated from fossil fuels declines. However, the subsidy‐induced increase in motor vehicle use will increase the other external costs. Also, the subsidy and the fall in excise tax revenue collected will add to the budget deficit. The phase‐in of electric vehicles provides an opportunity to reform special taxes and charges on the use of motor vehicles. The current ad hoc and long time ago imposed government taxes and charges on motor vehicles should be replaced with explicit taxes to internalise each of the external costs of motor vehicles.

Toward Tax-Efficient Low-Volatility Investing

This article reevaluates low-volatility investing strategies—in particular, their tax efficiency. Low-volatility strategies intend to help investors achieve market-like equity returns, but with less risk than the broader market. Among the low-volatility strategies, those with lower volatility carry lower returns but incur higher turnover and tax burdens. Explicit tax management can greatly improve the strategy’s performance. Tax management, however, is no easy task in practice due to burdensome record-keeping. This article proposes two sets of tax-managed low-volatility investing strategies that require different amounts of record-keeping. Both strategies can significantly improve the after-tax strategy returns while maintaining the compelling risk and pre-tax return profile. Specifically, accounting for net taxable gains alone can harvest most tax alphas, and accounting for the timing of tax lots accurately can further improve the strategy’s performance.

Summaries of Papers in This Issue

Summaries of Papers in This Issue

Toward Tax Efficient Low Volatility Investing

This paper reevaluates the low volatility investing strategies and, in particular, their tax efficiency. Low volatility strategies intend to help investors achieve market-like equity returns, but with less risk than that of the broader market. Among the low volatility strategies, those with lower volatility carry lower returns, but incur higher turnover and tax burdens. Explicit tax management can greatly improve the strategy performance. Tax management, nevertheless, is no easy task in practice due to the burdensome record keeping. This paper proposes two sets of tax managed low volatility investing strategies that require different amount of record keeping. Both strategies can significantly improve the after-tax strategy returns, while maintaining the compelling risk and pre-tax return profile. Specifically, accounting for net taxable gains alone can harvest most tax alphas, and accounting for the timing of tax lots accurately in addition can further improve the strategy performance.

The effect of implicit and explicit taxes on the purchasing of ‘high-in-calorie’ products: A randomized controlled trial

Public health taxes on less healthy food and beverage products have been shown to be effective in various settings. However, it is unclear if observed reductions in the quantity of taxed products purchased is a result of price increases due to the tax or the accompanying messaging and if the effects are influenced by the level of support for such taxes within the population. 941 adults residing in Singapore were randomized and asked to shop in one of four versions of a fully functional on-line experimental grocery store: 1) no tax control; 2) implicit tax showing only post-tax prices (i.e., 20 % higher than control prices) on high-in-calorie products; 3) fake tax showing pre-tax prices and a label falsely indicating that the price includes a 20 % tax on high-in-calorie products; and 4) explicit tax showing the same label as in 3) and an actual 20 % price increase applied to the high-in-calorie products. The proportion of high-in-calorie products purchased was 14 % in the control arm. We were unable to reject the null hypothesis of no effect in the implicit tax arm compared to control (0.08, 95 % CI −3.31 to 1.77) or in the fake tax arm compared to the control (2.59, 95 % CI −5.04 to 0.00) but observed a statistically significant 3.35 percentage point decrease (95 % CI −6.01 to −0.5) in the explicit tax arm compared to control. We were unable to reject the null hypothesis of no effect in any of the outcomes related to diet quality. Individuals who support the tax showed greater responsiveness to the explicit and fake taxes compared to those who do not (price elasticities of demand of −1.38 and −0.51 respectively). Results suggest that reductions in the proportions of high-in-calorie products purchased may be largely attributable to explicit messaging rather than to price increases. However, even when effective, policymakers should recognize that changes in purchasing patterns may not improve diet quality and that results may not generalize to other areas where levels of support differ.

A Report to the Connecticut Office of Policy and Management Regarding a Proposed Payroll Tax

This Report analyzes a 5% payroll tax that would be imposed on employers in the amount of the Connecticut wages they pay to their employees. An anticipated response to this tax is that employers would shift this tax to their employees by reducing their wages by the cost of the tax. In this case, there would also be a reduction of the existing personal income tax rates by 5 points, but only if there were a reduction in wages. The effect would be to eliminate the 3% and 5% brackets, and would only be applicable to wages; it would not apply to income from dividends, capital gains, interest, rents, royalties, and the like. This “tie-in,” that is, the reduction in tax rates only if wages are reduced, should be required or else there would be little incentive for employees to support a wage reduction. Tie-ins, such as this, have many complexities and are examined in the Report. The goal of the proposal is that workers would have more take-home pay, despite their wages being reduced. This results from a reduction in their taxable income and a reduction in their FICA taxes. Employers would also save in reduced FICA taxes. Consequently, a payroll tax would increase an employee’s take home pay at the expense of the federal fisc, which is part of its State charm. Somewhat counter-intuitively, even though wages are reduced, the combination of State income tax savings and the federal income and FICA tax savings means the employee is actually better off and will end up with more take-home pay. In the event that wages cannot be reduced, the payroll tax becomes an explicit tax on employers. Because wages would not be reduced, employers would not receive any decrease in the amount of FICA taxes they pay and the payroll tax would essentially be a 5% increase in the cost of doing business. In determining the outcomes of a proposed payroll tax, a critical threshold question is whether employers will be able to shift the payroll tax to employees by reducing their wages. If they cannot, there is no reason to adopt a payroll tax. However, this question could be avoided if the tax were elective by employers. Presumably they would not make the election if they thought they could not reduce wages. Because there are so many moving and interdependent parts, the lack of a fully drafted bill limits what can be said in this Report with any certainty. Nonetheless, the Report identifies many of the issues needing to be addressed, such as what groups could benefit from the tax, how the tax could be imposed on the federal government and tribal nations, and the tax’s impact on insurance companies. The Report suggests that the State reach out to New York to evaluate their experience, which has adopted a similar tax through a credit mechanism, which is a simpler approach than the one Connecticut is considering.

The Distributional Effects of Building Energy Codes

State-level building energy codes have been around for over 40 years, but recent empirical research has cast doubt on their effectiveness. A potential virtue of standards-based policies is that they may be less regressive than explicit taxes on energy consumption. However, this conjecture has not been tested empirically in the case of building energy codes. Using spatial variation in California’s code strictness created by building climate zones, combined with information on over 350,000 homes located within 3 kilometers of climate zone borders, we evaluate the effect of building energy codes on home characteristics, energy use, and home value. We also study building energy codes’ distributional burdens. Our key findings are that stricter codes create a non-trivial reduction in homes’ square footage and the number of bedrooms at the lower end of the income distribution. On a per-dwelling basis, we observe energy use reductions only in the second lowest income quintile, and energy use per square foot actually increases in the bottom quintile. Home values of lower-income households fall, while those of high-income households rise. We interpret these results as evidence that building energy codes result in more distortions for lower-income households and that decreases in square footage are responsible for much of the code-induced energy savings.

Macroeconomics with Endogenous Markups and Optimal Taxation

The neoclassical macroeconomic framework is extended to general preferences over a variety of goods supplied under monopolistic, Bertrand or Cournot competition to derive implications for business cycle, market inefficiencies and optimal corrective taxation. When markups are endogenously countercyclical the impact of shocks on consumption and labor supply is magnified through new intertemporal substitution mechanisms, and the optimal fiscal policy requires a countercyclical labor income subsidy and a capital income tax that is positive along the growth path and converging to zero in the long run. With an endogenous number of goods and strategic interactions, entry affects markups and the optimal fiscal policy requires also a tax on profits. We characterize the equilibrium dynamics and derive explicit tax rules for a variety of intratemporal preference aggregators including the quadratic, directly additive, indirectly additive and homothetic classes.

Финансовая репрессия и популизм

Due to its implicit nature, financial repression is a convenient fiscal policy measure for the populist government. Financial repression gives the populist government the opportunity to finance more government spending with less explicit taxes. The optimal parameters of financial repression in the form of nonmarket debt placement are determined for the populist government. Populism is introduced by the choice of government spending and tax on capital higher and lower respectively than those chosen through voting procedure. The overlapping generations model with a fully funded pension system and financial repression is used to determine the optimal fiscal policy of the populist government. Moreover, the influence of the two fiscal regimes on household welfare is considered. It is shown that financial repression in the form of nonmarket debt placement is an element of the optimal fiscal policy for the populist government. Such government will set the gross interest rate on government bonds lower than the gross interest on capital by placing its debt in the captive pension fund. This leads to the fall in the pension fund’s yield and to the decrease in household wealth. The optimal repressed interest rate on government bonds is higher the bigger the population growth rate is, the less the government is addicted to populism and the lower is the elasticity of substitution between consumption and government spending. We also show that the financial repression regime under populism is associated with higher welfare compared to the voting regime without populism. This result is the consequence of the fact that the populist policy allows the reduction of the distorting capital tax rate and its replacement by lump-sum financial repression.

Agressividade tributária e sustentabilidade empresarial no Brasil

A presente pesquisa tem como objetivo observar se a participação de empresas no Índice de Sustentabilidade Empresarial (ISE), listadas na BM&FBovespa, define alguma espécie de comportamento no tocante à agressividade tributária. As empresas listadas, ou não, no ISE foram avaliadas no período de 2010 a 2014 por meio de duas medidas de agressividade tributária: a taxa efetiva de tributação ETR (Effective tax Rate) e a diferença entre os Lucros Contábeis e o Tributário (Book Tax Differences - BTD). Por hipóteses, especulava-se que as empresas listadas no índice seriam menos agressivas tributariamente, com o propósito de sinalizar um comportamento coerente com uma preocupação social. Entretanto, não foi encontrada uma teoria racional para justificar essa relação antecipada e, na verdade, sustentabilidade empresarial, em certa medida, poderia inclusive, estar relacionada com um planejamento tributário mais eficiente. A agressividade fiscal envolve o emprego de técnicas que privilegiam o planejamento tributário com vistas a reduzir a tributação explicita. Em certas circunstâncias empregam-se técnicas legais (elisão) e outras ilegais, seja por sua abusividade na forma ou mesmo por ter caráter evasivo com vistas a reduzir a carga tributária. Os resultados documentados na pesquisa indicaram que as empresas que compõem o ISE tendem a ser menos agressivas tributariamente relativamente àquelas que não participam do ISE. Esse achado serve para antecipar o comportamento tributário de uma empresa em função dos valores que prestigia.

Agressividade Tributária: Um Survey da Literatura

Objective and Method: The objective in this article is to review the international and Brazilian studies on tax aggressiveness, considered as the behavior of trying to avoid or minimize the explicit tax burden for the corporation. As an academic research theme, tax aggressiveness or tax avoidance reveals to be a diversified and vast topic, although relatively recent. Results and Contributions: Among the research questions developed in this theme, the identification of the determinants of the company’s tax aggressiveness is highlighted, considering: (i) company characteristics; (ii) environmental attributes; (iii) gatekeeper restrictions; and (iv) incentives for the firms. The determinants of the managers’ tax aggressiveness and the influence of governance and the control structure are reviewed. In addition, the potential economic-financial consequences of tax aggressiveness for the firms and the existing empirical proxies to measure tax aggressiveness are identified. The study is closed off with the presentation of future research opportunities on the theme.

Agricultural Distortions and Economic Growth in Southern Africa: Evidence from Mozambique, Zambia and Zimbabwe (1970-2011)

Introduction:The first decade of 2000 was considered Africa’s decade of unprecedented growth as it was the fastest growing region in the world. This growth is believed to have largely been a benefit of the commodity super-cycle which is beginning to tail-off. Analysts perceive that growth in Africa is currently more threatened by global trends and region specific risks around agriculture and politics.Statement of the problem:It has been noted that African countries have experienced stagnant or declining agricultural productivity growth rates, increasing rural poverty, hunger and malnutrition coupled with low competitiveness in global markets over the decades.Methodology:Using the database on Distortions to Agricultural Incentives, the World Development Indicators and the Penn World Tables, the determinants of economic growth in Southern Africa and the impacts of a pro or anti agricultural policy regime on economic growth were investigated. In this study, three Southern Africa countries were investigated, that is, Mozambique, Zambia and Zimbabwe.Results:The Panel Data Analysis results suggest that 1% decrease in the degree of anti-agriculture policy bias results in a 0.1% increase in real per capita GDP. Further, 1% increase in the share of gross capital formation in GDP results in 0.04% increase in real per capita GDP.Conclusion:The study showed that reducing direct and indirect, implicit and explicit taxation to agriculture relative to non-agriculture sector would result in improved economic growth in the three Southern African countries of Zambia, Zimbabwe and Mozambique.

Taxing Bachelors in America: 1895-1939

Bachelor taxes have existed across the globe and throughout millennia. In modern income taxes, they occur only indirectly, as by-products of favorable exemptions and tax rates for married couples. However, in prior centuries—even the 20th century—bachelor taxes existed as direct, explicit taxes levied on bachelors as bachelors. From 1895 through 1939, American municipalities and states proposed these taxes with surprising frequency and newspapers consistently reported on them as well as on foreign bachelor taxes. Although often greeted with hilarity and rarely passed, explicit bachelor taxes during this period were motivated by serious concerns. The need for revenue was one reason these taxes were proposed. It was not, however, the only—or even the major—reason. This paper suggests that social unease was the primary motivation for American bachelor taxes in this period. Decades of industrialization, urbanization, immigration, and increased consumerism had created social tensions and dislocations by radically altering everyday living patterns and basic social institutions. The bachelor tax proposals and discussions during this period expressed many people’s discomfort with the changes. Since they believed marriage was the foundation of society and American democracy, they perceived any threat to marriage as threatening the fabric of America. Consequently, they viewed bachelor taxes as a remedy for the moral decay of the nation. In actuality, the taxes were mainly expressive in nature. Not only did most of them fail to pass, but even if they did pass, they were largely ineffective methods to increase marriages, as some contemporaries noted. The demise of explicit bachelor taxes did not end concerns about marriage and the moral state of society. These same concerns were part of the debates about mandatory joint returns in the late 1930s and early 1940s. Similarly, they remain an important element of recent debates about marriage penalties and the tax treatment of families.

Energy taxes, reforms and income inequality: An empirical cross-country analysis

Environmentally-motivated taxes on energy products can effectively induce households and firms to take into account the environmental externalities of energy transformation and use. The levy of such taxes is, however, often hampered by public concerns over possible distributional effects. This paper analyses the macroeconomic relationship between taxes on energy products and income inequality. It also investigates whether this relationship is different in cases where explicit mechanisms to shift tax burden from labour and income to environmentally harmful activities have been established. In contrast to earlier empirical studies which analyse the distributional effects of energy taxes on the uses of household income, this paper focuses on their macroeconomic relationship with income sources. Using a panel of 34 OECD countries from 1995 to 2011, the paper shows that in the absence of explicit tax revenue recycling mechanisms there is a positive, although modest, relationship between the share of revenues from energy taxes in GDP and the Gini coefficient, which is the adopted measure of income inequality. In contrast, where such mechanisms have been implemented, there is an inverse and relatively stronger relationship between the share of energy tax revenues in GDP and inequality in income sources.

Assessing the synergistic reduction effects of different energy environmental taxes: the case of China

Imposing any tax among carbon tax, sulfur tax and nitrogen tax on fossil fuels will also reduce the other two air pollutants. Neglecting the synergistic effect of each energy environmental tax and levying carbon tax, sulfur tax and nitrogen tax at the same time will overestimate the abatement cost of air emissions. This study adopts a partial equilibrium model which uses linear demand and supply curves to illustrate the emission reductions in carbon tax, sulfur tax and nitrogen tax. The synergistic reduction effects of CO2, SO2 and NO x are firstly evaluated under the implicit tax scenario of resource tax and consumption tax on fossil fuels. Then it is compared with the synergistic reduction effects of CO2, SO2 and NO x under different explicit tax scenarios of increasing tax rate on carbon tax, sulfur tax and nitrogen tax. If the synergistic reduction effect of explicit environmental taxes is better, this research aims to find one kind of environmental tax among carbon tax, sulfur tax and nitrogen tax with the best synergistic reduction effect and to provide a decision support for the policy makers of energy environmental taxes. The results indicate that explicit environmental taxes have better synergistic reduction effects compared with the current implicit environmental taxes. And explicit sulfur tax can lead to the largest synergistic reduction effects of CO2, SO2 and NO x . Therefore, the policy makers of energy environmental taxes could consider adopting the explicit sulfur tax to reduce various environmental air emissions at the largest amount.