Explicit Tax Research Articles

The Practice and Tax Consequences of Nonqualified Deferred Compensation

Although nonqualified deferred compensation plans lack explicit tax preferences afforded qualified plans, it is well understood that nonqualified deferred compensation results in a joint tax advantage when employers earn a higher after‐tax return on deferred sums than employees could do on their own. Several commentators have proposed tax reform aimed at leveling the playing field between cash and nonqualified deferred compensation, but reform would not be easy or straightforward. This Article investigates nonqualified deferred compensation practices and shows that joint tax minimization often takes a backseat to accounting priorities and participant diversification concerns. In practice, the largest source of joint tax advantage likely stems from use of corporate owned life insurance (COLI) to informally fund nonqualified deferred compensation liabilities, suggesting that narrow reform aimed at COLI use might be a more attractive policy response than fundamental reform of the taxation of nonqualified deferred compensation.

Implicit Taxes of U.S. Domestic and Multinational Firms Over the Past Quarter-Century

Recent research by Dyreng, Hanlon, Maydew, and Thornock (2015) finds that the effective tax rates for both foreign and domestic firms have been steadily decreasing over recent decades and that multinational firms (MNEs) do not have a tax-based cost advantage relative to their domestic counterparts. This paper extends this research and examines implicit taxes for MNEs. We use the approach outlined by Jennings, Weaver, and Mayew (2012) and find that for both domestic and multinational firms, reductions of effective tax rates are only partially offset by implicit taxes. Further, we find that implicit taxes for MNEs are lower than for domestic firms and have fallen over time, while implicit taxes on domestic firms have been rising. We also find that differences in implicit taxes between domestic and MNE firms widen when MNE firms derive a larger portion of their pretax income from foreign sources. Our results underscore the contention in Shackelford and Shevlin (2001) that measuring differences in explicit tax without implicit taxes may lead to incomplete findings.

Does Australia Need an Annual Wealth Tax? (And Why Do We Now Apply One Only to Pensioners)

This paper argues that given the current hybrid income-expenditure tax system in Australia (hybrid IT/ET) a wealth tax could make sense as a way of ironing out disparities in the tax treatment of different assets. A wealth tax could be designed to approximate a comprehensive income tax (CIT) outcome by combining a wage tax with imputed asset income (deeming), or it could fall more lightly. We already have a harsh wealth tax in the welfare system, the asset test; the issue arises as to why we would confine wealth taxation to the not-so-well-off. If we move the income tax to an ET of, e.g., a consumption tax (CT) type a wealth tax might still make good sense, although the implied rate may be lower than under the wage tax as the CT taxes some part of economic rents. However if we move towards explicit taxation of economic rents using, say, the rate of return allowance (RRA) or its cash-flow counterpart, the Z-tax, a wealth tax may be less needed, as such rents comprise two-thirds the total return on capital.

Evolutionary Analysis of Tax Law: A Methodological Approach

The present paper conceptualizes a methodology of an evolutionary tax law analysis from a critical rationalist perspective. This methodology has the following characteristics: We interpret tax rules as means to achieve tax goals. Means-end-statements have an ethical and an empirical dimension. The ethical dimension implies that tax goals and tax rules and their secondary effects must be compatible with the aims of market economy regulation. The empirical dimension includes the question if tax goals are realizable and if tax rules cause secondary effects. To answer this question, we need evolutionary hypotheses of tax effects. A quasi-nomological hypothesis regarding the evolutionary effects of taxation is as follows: “If taxation changes the rank order of the relevant decision-making options according to the actors’ subjectively rational decision criteria, they decide differently if they take taxes into account than they would if they did not”. From an evolutionary point of view, freedom of choice and equality before the law are the contributions of a market economy to the common good. In our opinion, equability of taxation is compatible with the market economy goals “freedom of choice” and “equality before the law”. Equability of taxation, however, implies in principle decreasing such decision-making effects of taxation which reduce the explicit tax payment burden (in relative terms). These decision-making effects are designated here as tax avoidance decisions. We need the evolutionary tax effects framework mentioned above in order to develop tax rules which decrease such tax effects. By way of contrast, tax rules that induce or accept tax avoidance decisions conflict with equability of taxation. Such rules are sometimes driven by social goals. Thus, we have to analyze such rules from an evolutionary perspective with regard to their justification, feasibility and proportionality.

Did Housing Taxation Contribute to Increase Riskier Borrowing?

This paper estimates, using a simultaneous equation model, the determinants of mortgage, including as a variable the tax saving due to the treatment of mortgage payments in Spanish income tax. We use an unusually rich data set obtained from a housing market intermediary with franchisers throughout the majority of the Spanish provinces. We observe that the income tax credit increased riskier borrowing during the housing boom years. Increasing by one percentage point the ratio of the present value of the stream of explicit tax savings to the price of the property, the mortgage amount granted increases by 1.6 %, whereas it causes a 2 % decrease in the term. This in turn, implies that the time discount factor increased in our sample by about 0.7–1.1 percentage points causing individuals to borrow riskier amounts of mortgage for shorter terms. This observation has important policy implications for governments wishing to foster real estate markets growth.

Abusive Tax Avoidance and Institutional Corruption: The Responsibilities of Tax Professionals

Professionals and professional firms provide a range of taxation-related services, from advising clients on their tax obligations to designing and implementing tax-reduction strategies. Provided that tax professionals respect the letter of the law, are all such tax services morally permissible? We answer this question in the negative by distinguishing between institutional integrity and institutional corruption in fiscal arrangements; tax services that promote a situation of fiscal institutional corruption are impermissible, given that they severely inhibit the ability of taxation institutions to collect revenue efficiently and equitably. The professional facilitation of abusive tax avoidance — explicit tax reduction that is contrary to the spirit or intent of the law — is a particularly prominent aspect of fiscal institutional corruption. We illustrate the role of professionals in designing, promoting and implementing abusive tax avoidance strategies through several case studies, including the Wyly offshore network and the KPMG tax shelter scandal. In addition, we claim that tax professionals have specific responsibilities to help remedy institutional corruption associated with abusive tax avoidance. To argue this thesis, we present general principles for assigning remedial responsibilities to particular agents. We then apply those principles to determine what three major groups of tax professionals — accountants, lawyers, and financial experts — ought to do about abusive tax avoidance.

Implicit and Explicit Taxes: Study of Asia Pacific Banking

Abstract : Reserve requirements act as an implicit tax on the banking industry that can affect their performance. Using bank-level data for 250 firm-years in the Asia Pacific region during the period 2007-2012 and panel data model through fixed effect regression with robust function, this paper analyzes how tax policy, bank characteristics, and macroeconomic environment affect the bank profitability. This study controls for the firm characteristics such as bank size, bank liquidity, and overhead, while the GDP variable to control the country characteristic. This paper confirms some of the findings in the previous studies that the implicit tax policy (reserve requirements) has a positive effect on bank profitability that is proxied with return on assets. While the explicit tax policy does not affect it. This study also gives evidence that the role of foreign bank ownership structure of both the reserve requirements and the explicit tax is higher than the foreign non-banks. Abstrak: Persyaratan cadangan bertindak sebagai pajak implisit pada industri perbankan yang dapat mempengaruhi kinerja mereka. Dengan menggunakan data tingkat bank selama 250 tahun perusahaan di kawasan Asia Pasifik selama periode 2007-2012 dan model data panel melalui regresi efek tetap dengan fungsi yang kuat, makalah ini menganalisis bagaimana kebijakan pajak, karakteristik bank, dan lingkungan makroekonomi mempengaruhi profitabilitas bank . Penelitian ini mengontrol untuk karakteristik perusahaan seperti ukuran bank, likuiditas bank, dan overhead, sedangkan variabel PDB untuk mengendalikan karakteristik negara. Makalah ini menegaskan beberapa temuan dalam studi sebelumnya bahwa kebijakan pajak implisit (persyaratan cadangan) memiliki efek positif pada profitabilitas bank yang diproksi dengan laba atas aset. Sementara kebijakan pajak eksplisit tidak mempengaruhinya. Penelitian ini juga memberikan bukti bahwa peran struktur kepemilikan bank asing baik dari persyaratan cadangan dan pajak eksplisit lebih tinggi dari non-bank asing.

Determinants and Consequences of Corporate Tax Avoidance

I provide a first comprehensive literature survey with an exclusive focus on empirical corporate tax avoidance research. Shackelford and Shevlin [2001] traced the earlier developments of archival, microeconomic-based, empirical income tax research, pointing out a nascent interest for research on the determinants of tax aggressiveness. Nine years later, Hanlon and Heitzman [2010] labeled “corporate tax avoidance” as one of four “main areas” of tax research in accounting. Until and since then, work in this area has grown at a rapid pace and clearly remains a vibrant area of tax research. Hence, the goal of this study is to assist both researchers who are new to this field as well as experienced readers by providing an updated overview of empirical studies investigating firms’ efforts to reduce their explicit tax burden. In a first step, the origins of tax avoidance research in the corporate context are briefly summarized. The second section briefly reviews numerous fundamental firm characteristics (e.g. size, capital structure, and asset mix) that have been shown to explain some variation in levels of tax avoidance. Third, the main part of this study is devoted to the discussion of the extensive empirical findings on the determinants and consequences of corporate tax avoidance (e.g. various corporate governance arrangements and alternative firm value implications). Finally, the study concludes with suggestions for future research.

Removing Rents: Why the Legal System is Superior to the Income Tax at Reducing Income Inequality

Reducing income inequality is, in the eyes of many, one of the major political issues of this time. The conventional political approach to reduce income inequality is to raise taxes for the wealthy and redistribute the proceeds to the poor. This approach finds support in the economic literature, which postulates that redistribution through the tax system is more efficient than through the legal system.I argue instead that the legal system is intrinsically superior at reducing income inequality — at least to the extent that inequality is not caused by effort or talent differences but by rents (profits that would not have been earned in a perfectly competitive and transparent economy). The legal system is superior because it can address the specific market failures that make rents possible. This way, it can prevent income inequalities from occurring in the first place — an ex ante approach. The income tax system, by contrast, tries to correct a problem ex post — after it has already occurred.Rents can be seen as implicit commodity taxes, the proceeds of which go to private individuals or companies rather than to the government; just like explicit commodity taxes, they cause labor and price distortion. Legal rules that prevent rents therefore reduce labor and price distortion. Income taxes, by contrast, increase labor distortion and leave the price distortion unaffected. They are less efficient at redistributing income because they are an overly broad instrument, treating income from rents and hard work alike.This finding has major implications. The first is that trade-offs between equity and efficiency should be made in the legal system whenever legal rules generate or reduce rents. The second is that rents (and ‘windfalls’) should be considered as costs, rather than as zero-sum effects, in law and economics models.

Compaq Redux: Implicit Taxes and the Question of Pre-Tax Profit

This paper takes a new look at the cross-border dividend-stripping transactions that gave rise to the Fifth Circuit's opinion in Compaq v. Commissioner and the Eighth Circuit's opinion in IES Industries v. Commissioner. In both cases, the circuit courts held for the taxpayers and rejected the Commissioner's claim that the transactions lacked economic substance because the taxpayers were sure to lose money on the transactions before taxes. These cases generated extensive commentary that was split into two diametrically opposed camps. One group argued that the decisions were correct because the transactions were economically profitable business transactions. The other group argued that the transactions were blatant, abusive tax shelters; and that the courts should have struck them down. Because the commentators in the second group conceded that the transactions generated a pre-tax profit, these commentators also offered a range of proposals to modify or replace the pre-tax profit test. Although the tax benefit of crossborder dividend-stripping was sharply reduced by subsequent Congressional enactments, that action hid rather than resolved the issue whether the tax shelter jurisprudence is fundamentally flawed because there is a class of abusive transactions that produce a guaranteed profit before tax, but do not run afoul of the anti-abuse provisions in the tax law.This paper argues that the Compaq and IES Industries transactions do not reveal any fundamental failings with either anti-abuse jurisprudence generally or the pre-tax profit test in particular. This paper demonstrates that the circuit courts reached the wrong conclusions in those cases because the parties, the courts, and the commentators all ignored implicit taxes. That is not surprising because the implicit taxes in these cases were difficult to see. These taxes were negative implicit taxes, which drove down the cum dividend price of the stripped stock, and therefore made the transactions appear profitable before taxes. However, once implicit taxes are taken into account, the transactions in those cases are properly understood to be unprofitable before taxes.Finally, nearly ten years ago, Charlotte Crane observed that tax doctrine has all but ignored implicit taxes and she challenged commentators, lawyers and judges to think carefully about how implicit taxes can be incorporated into tax doctrine. My proposal to calculate pre-tax profit for the purpose of anti-abuse jurisprudence before both implicit and explicit taxes is, I believe, the first proposal to explicitly recognize implicit taxes in tax doctrine.

International Competitiveness, Tax Incentives, and a New Argument for Tax Sparing: Preventing Double Taxation by Crediting Implicit Taxes

Tax sparing occurs when a country with a worldwide tax system grants its citizens foreign tax credits for the taxes that they would have paid on income earned abroad, but that escapes taxation by virtue of foreign tax incentives. The supporters of tax sparing argue that it is a form of foreign aid, an obligation owed to developing countries, and a legitimate means of improving the competitiveness of resident investors. Tax sparing, however, has long been opposed by the United States on the grounds that it is an expensive and problematic concession to developing countries, inconsistent with basic and fundamental tax principles, and an inappropriate mechanism for improving the competitiveness of resident investors. The U.S. position appears to be carrying the day as tax sparing has been on the wane.In contrast with the emerging consensus, I offer a new argument for tax sparing. Drawing on the literature on implicit taxes, I argue that tax incentives produce implicit taxes. From the perspective of the investor, implicit taxes are as real as traditional explicit taxes. Thus, tax sparing is best viewed as extending the foreign tax credit to include implicit taxes. Accordingly, I argue that tax sparing is consistent with the notion of a single level of taxation and the foreign tax credit. I also argue that tax sparing is necessary to prevent domestic investors from being disadvantaged by foreign tax incentives. In addition, I show that such arguments support a greatly expanded form of tax sparing. Finally, I demonstrate that the tax sparing credit, as currently calculated, will usually exceed the implicit tax paid and propose an alternative method of calculating the credit that will place investors residing in countries with worldwide tax systems on par with other investors.

The Extent of Implicit Taxes at the Corporate Level and the Effect of TRA86*

We examine the extent of implicit taxes at the corporate level and the effect on implicit taxes of the Tax Reform Act of 1986 (TRA86) in the United States. Using a variety of specifications, we find consistent evidence that implicit taxes eliminate virtually all of the cross-sectional differences in explicit tax preferences prior to TRA86, and then abruptly decline and eliminate only about one-third of the crosssectional differences in tax preferences in years following TRA86. We triangulate this evidence that implicit taxes declined following TRA86 by also providing evidence (a) of a decline in the relation between changes in tax preferences and changes in pre-tax returns, (b) of an increase in the persistence of tax-related earnings changes, (c) that these dramatic economic changes are priced by investors. Finally, we provide evidence suggesting that the decline in implicit taxes after TRA86 is driven at least in part by expansion of aggressive tax planning and use of tax shelters. Taken together these results indicate that TRA86 had a profound and lasting effect on implicit taxes at the corporate level. JEL classification : M41, H25

Aggressive Tax Strategies and Corporate Tax Governance: an Institutional Approach

This paper deals with the impact of tax-aggressive strategies on corporate governance by adopting an agency perspective of the firm and discusses how certain corporate tax governance measures may limit these kinds of managerial actions. The paper defines the regulative concept of effective tax planning as a tax strategy that minimizes not only explicit taxes, but also implicit taxes and non-tax costs, focusing on the agency problems emerging between shareholders and tax managers. This key concept is then used to identify what kind of tax-aggressive strategies pose relevant policy issues and to highlight important issues, such as: why and to what extent do managers pursue aggressive tax strategies, why are these strategies used in large companies, do these strategies advance shareholder value, and how can tax savings obtained through these strategies be measured? The conclusion os that aggressive managerial tax behaviour requires counterbalancing policies which are not limited to the traditional anti-avoidance rules but also include the tools of corporate tax governance; such as risk and metarisk management, disclosure rules, regulation of tax advisors, reporting

Cost Sharing and the Acrobatics of Arm’s Length Taxation

The cost sharing regime of the United States enables multinational enterprises (MNEs) to export US intangible property to low or no tax jurisdictions, essentially tax-free. This is in stark contrast to long-standing US policy and the explicit tax agenda of the Obama administration. Two recent cases have circumvented attempts by the Internal Revenue Service (IRS) to mitigate cost-sharing-based tax avoidance. This article explains the regime and how the insistence of the IRS on arm’s length-based transfer pricing rules contributed to the current non-taxation of foreign income of US MNEs and explores alternative reforms.

Capital Control: An Experience of India, Thailand and Malaysia

A very large variety of controls are used by developing countries to restrict and regulate the movement of capital which allows agents to reap the advantages of diversification of assets in the financial and real sectors. This article discusses in brief the classification of controls like, dual (two-tier) or multiple exchange rate systems. Explicit taxation of cross-border flows, Indirect taxation of cross-border flows, in the form of non-interest bearing compulsory reserve/deposit requirements and other regulatory controls and then carries out a comparative analysis of these controls in the countries. We also discuss when and What Type of Controls are Effective, Crises, and the Lessons from Experience of countries like Thailand India and Malaysia.

Implizite und explizite Lohnsteuerbelastung in Deutschland

Summary Social insurance contributions include an implicit tax portion if the contributions are higher than the benefits. For the first time, this implicit tax burden is calculated for the entire German social security system regarding income groups, age groups and sex. There is evidence that the implicit tax burden is throughout relatively high. The age-specific tax structure is characterized by an inversely U-shaped curve: The implicit tax burden is weaker for young and older employees subject to social insurance than for employees of the in-between generation. The income-specific tax profiles indicate a negative wage tax for insured with low income and then a strong progressive trend. On a higher level of income, the burden has a regressive course. The combination of implicit wage tax caused by social security system and explicit wage tax caused by income tax system makes the regressive course of tax burden on high income level disappear, so that a progressive wage tax scale with a negative component for lower incomes can be observed.

Aggressive Tax Strategies and Corporate Tax Governance: An Institutional Approach

This paper deals with the impact of tax-aggressive strategies on corporate governance by adopting an agency perspective of the firm and discusses how certain corporate tax governance measures may limit these kinds of managerial actions. We first clarify a few basic concepts such as tax minimization, effective tax planning, tax avoidance, and tax evasion, which are important to understand in the discussion about aggressive tax behaviour. We further define the regulative concept of effective tax planning as a tax strategy that minimizes not only explicit taxes, but also implicit taxes and non-tax costs, focusing on the agency problems emerging between shareholders and tax managers and we use this key concept as a benchmark to identify what kind of tax-aggressive strategies pose relevant policy issues. By using the agency perspective we also highlight a series of important issues, such as: why and to what extent do managers pursue aggressive tax strategies, why are these strategies used in large companies, do these strategies advance shareholder value, and how can tax savings obtained through these strategies be measured? We conclude that aggressive managerial tax behaviour requires counterbalancing policies which are not limited to the traditional anti-avoidance rules but also include the tools of corporate tax governance; we also suggest that these tools can be divided in two groups: measures aimed at improving corporate governance and measures aimed at dealing with the ‘book-tax gap’. The former type of corporate tax governance measures include risk and meta-risk management, disclosure rules, regulation of tax advisors, reporting by stakeholders, and penalties connected with tax avoidance. The latter type of corporate tax governance measures include reconciliation reports and publication of tax returns.

The Extent of Implicit Taxes at the Corporate Level and the Effect of TRA86

We examine the extent of implicit taxes at the corporate level and the effect on implicit taxes of the Tax Reform Act of 1986 (TRA86). Using a variety of specifications, we find consistent evidence that implicit taxes eliminate virtually all of the cross-sectional differences in explicit tax preferences prior to TRA86, and then abruptly decline and eliminate only about one-third of the cross-sectional differences in tax preferences in years following TRA86. We triangulate this evidence that implicit taxes declined following TRA86 by also providing evidence (a) of a decline in the relation between changes in tax preferences and changes in pre-tax returns, (b) of an increase in the persistence of tax-related earnings changes, (c) that these dramatic economic changes are priced by investors. Finally, we provide evidence suggesting that the decline in implicit taxes after TRA86 is driven at least in part by expansion of aggressive tax planning and use of tax shelters. Taken together these results indicate that TRA86 had a profound and lasting effect on implicit taxes at the corporate level.

Implicit Land Taxation and Affordable Housing Provision in England

The paper considers the proposal in England that a continuing requirement for residential developers to contribute directly to the supply of affordable housing in return for planning permission should operate alongside a new tax on land value increases due to planning permission. The paper asks whether it is right in principle for affordable housing to be supported by the implicit taxation of development. It is argued that in terms of transparency, clarity, and certainty explicit taxation is to be preferred to implicit taxation. It is thus suggested that once the new explicit tax is in place developers should no longer be routinely required to pay an additional implicit affordable housing tax. Affordable housing should, it is argued, be supported on the basis of need, not the resources available from the development process. The link between the provision of affordable housing and planning obligations should be broken.

RAMSEY MONETARY POLICY WITH CAPITAL ACCUMULATION AND NOMINAL RIGIDITIES

Recent literature on the design of optimal monetary policy has shown that deviations from price stability are small whenever prices are sticky. This paper reconsiders this issue by introducing capital accumulation in the model. Optimal monetary policy in this setup implies small deviations from price stability. The monetary authority optimally uses inflation as an explicit tax on monopolistic profits to reduce the price markup across states. Variable markup is achieved in this setup because the share of investment demand over output varies across states and in response to TFP shocks.