Federal Tax Rates Research Articles

Diffusion of Corporate Philanthropy: Economic and Institutional Effects on the Establishment of Company-Sponsored Foundations

Economists have contributed the bulk of the literature on corporate philanthropy, focusing on the influence of federal tax rates on corporate contributions. With few exceptions, little attention has been paid to institutional pressures on corporate giving. By incorporating hypotheses derived from both economic and institutional theories, this paper seeks to explain the creation of company sponsored foundations among Fortune 500 firms, 1950-2000. In this study, 1,523 firms are analyzed using a discrete-time logit model to estimate the hazard for establishing a company-sponsored foundation. I find that the inception of company-sponsored foundations is driven not only by economic forces, but can be explained by such institutional pressures as peer influence, press coverage, and public perception.

Spillover Effects in a Federal Country with Vertical Tax Externalities

We analyze how spillover effects may affect the choice of a federal tax rate in a federal country with vertical tax externalities. Our main result shows the conditions under which the federal tax rate with spillover effects is lower or higher than the federal tax rate without spillover effects. The effects of vertical tax externalities can be modified by the reaction of the federal government to the horizontal externality due to spillover effects.

All Income is Not Created Equal: Cross-Tax Elasticity Estimates in the United States

In the United States, marginal tax rates on capital income and ordinary income (e.g. wages and salaries) can vary substantially. The same household might face a federal tax rate on their wage income that is 20 percentage points higher than the tax rate on long-term capital gains. This differential complicates welfare and revenue analyses of tax reforms, as individuals might alter their capital income decisions in response to an ordinary income tax change. In this paper, I estimate cross-tax elasticities for capital and ordinary income, using a large non-public panel of federal income tax returns from 1997-2007. I find two key results, though both are sensitive to a variety of specification decisions. First, capital gains respond to both the capital gains tax rate and the ordinary income tax rate. Second, I find mixed evidence that ordinary income responds to the ordinary income tax rate and the long-term capital gains tax rate. These results suggest cross-tax responses between these two bases are important, and should not be ignored when estimating taxpayer responses in the United States.

Paying for harbor maintenance in the US: Options for moving past the Harbor Maintenance Tax

The Harbor Maintenance Tax is a fundamentally flawed maintenance funding mechanism for the critical US port system. Three alternatives were analyzed. User fee rates were estimated for either a national or regional tonnage based fee. Our results indicate that maintenance cost recovering regional fees could vary widely from about 10cents per tonne to nearly 80cents per tonne. A national rate would be about 30cents per tonne. The large regional differences and affects on bulk shippers are likely to make implementing and maintaining cost recovering tonnage based fees infeasible. Two other mechanisms are considered. One possibility is to abolish the HMT without a replacement mechanism. The obvious strength of this approach is its simplicity, the weaknesses is that it is not budget neutral. Another possibility is to increase the federal diesel tax rate. One strength of the approach is the reasonable rate increase required to recover port maintenance costs (estimated between 0.278 and 0.315cents per liter). An additional strength is that relatively inefficient fuel users will either make the largest share of the additional payments or the freight will shift modes to one that is more efficient. One weakness is that the rate has been unchanged since 1997, this points to the political difficulty involved in passing such a rate increase.

Reforming an asymmetric union: On the virtues of dual tier capital taxation

The tax competition for mobile capital, in particular the reluctance of small countries to agree on measures of tax coordination, has ongoing political and economic fallouts within Europe. We analyse the effects of introducing a two tier structure of capital taxation, where the asymmetric member states of a union choose a common, federal tax rate in the first stage, and then non-cooperatively set local tax rates in the second stage. We show that this mechanism effectively reduces competition for mobile capital between the members of the union. Moreover, it distributes the gains across the heterogeneous states in a way that yields a strict Pareto improvement over a one tier system of purely local tax choices. We also discuss the effects of diverging capital endowments within the union and capital flows to third countries.

Vertical tax competition in Brazil: Empirical evidence for ICMS and IPI in the period 1995–2009

Abstract The main objective of this study is to quantify the impact caused by changes in federal tax on the tax policy of the Brazilian states, considering the presence of horizontal tax competition between states. Using panel data covering 26 Brazilian states plus the Federal District during the period 1995–2009, two models were estimated representing the average reaction of the states in response to changes in federal tax rates. In the first model, both levels of government act simultaneously, whereas in the second model, reaction is sequential, with the federal government acting as the leader in defining its effective tax rates. The results indicate a positive and significant response of states to increases in the federal tax rate, resulting in an over-taxation of the common tax base and higher tax rates. Additional tests show that the first model is the most suitable to represent the problem analysed.

Relative Prices and Substitution Across Wage, Welfare, and Disability Income

In this paper I exploit the fact that the social and economic reforms over the past two decades differentially affected the opportunity costs of non-participation in work, welfare, and disability programs for single mothers across different birth-year and education cohorts. This cohort variation in after-tax wages and transfer benefits is used to identify own- and cross-price elasticities of demand for and substitution across wage, welfare, and disability income over 1979 to 2001 in the Current Population Survey. To estimate these key parameters I model household preferences with a conditional Almost Ideal Demand System that admits corner solutions, nonseparability, endogenous wages and incomes, and latent heterogeneity via cohort and state fixed effects. I match individual and family-level data in the CPS both with family-specific federal, state, and payroll tax rates, and with state-specific and time-varying benefit levels and effective tax rates in the AFDC and SSI programs. Using a two-limit Tobit instrumental variables estimator I find strong evidence of sizable own and cross-programmatic substitution effects. For example, the estimated elasticities imply that between 1979 and 1999 the increase in the generosity of SSI relative to AFDC accounts for about 40 percent of the average growth in SSI, while the increase in real wages accounts for about one-half of the average decline in AFDC shares over the past two decades. Simulations suggest that changes in relative after-tax wages and transfer-program benefits over the past two decades lead to a substantial pull out of cash welfare and into expanded reliance on employment and disability as a means of financial support among single mothers.

ESTIMATION OF MUNICIPALITY FEDERAL TAX POTENTIAL

The paper measures the federal tax potential in the city of Obninsk. The subject of research is to improve the estimation procedure for measuring municipality federal tax potential. During the research we used the methods based on the indicators of income actually collected and those of tax reporting, as well as developed methodology on the basis of Laffer curve and regression analysis. Inflow of Federal taxes in the Obninsk budget in 2001-2009 was analyzed. Average and optimal federal tax rates in Obninsk were calculated and recommendations for increasing tax potential of the municipal unit were made. The concept of “measure of use of municipality federal tax potential” was introduced, and its analysis was conducted for 2001-2009. The practical implications of research consists in the fact that the main methodological recommendations developed during the research reveal the important directions of municipality tax potential increase , its correct analysis and forecasting and can be used in practice by the municipality with the purpose of budget planning for next year. DOI: http://dx.doi.org/10.12731/2218-7405-2013-8-15

Mileage-Based User Fee: A Financial Evaluation Case Study for the State of Florida

Fuel taxes, assessed on a per-gallon basis nationally, have been the major source of transportation funding for the past century. Despite increasing travel demand, aging infrastructure, and soaring construction, operation, and maintenance costs, federal tax rates have remained unchanged since 1993. This article assesses the financial impacts of the current per-gallon taxing regime and a variety of travel demand management strategies, utilizing mileage-based user fees (MBUFs) for the state of Florida. The results indicate that combining MBUFs with congestion pricing (CPMBUFs) can be a viable pricing and demand management strategy for enhancing Florida's transportation funding.

U.S. Alcohol Affordability and Real Tax Rates, 1950–2011

The affordability of alcoholic beverages, determined by the relationship of prices to incomes, may be an important factor in relation to heavy drinking, but little is known about how affordability has changed over time. To calculate real prices and affordability measures for alcoholic beverages in the U.S. over the period from 1950 to 2011. Affordability is calculated as the percentage of mean disposable income required to purchase 1 drink per day of the cheapest spirits, as well as popular brands of spirits, beer, and wine. Alternative income and price measures also are considered. Analyses were conducted in 2012. One drink per day of the cheapest brand of spirits required 0.29% of U.S. mean per capita disposable income in 2011 as compared to 1.02% in 1980, 2.24% in 1970, 3.61% in 1960, and 4.46% in 1950. One drink per day of a popular beer required 0.96% of income in 2010 compared to 4.87% in 1950, whereas a low-priced wine in 2011 required 0.36% of income compared to 1.05% in 1978. Reduced real federal and state tax rates were an important source of the declines in real prices. Alcoholic beverages sold for off-premises consumption are more affordable today than at any time in the past 60 years; dramatic increases in affordability occurred particularly in the 1960s and 1970s. Declines in real prices are a major component of this change. Increases in alcoholic beverage tax rates and/or implementing minimum prices, together with indexing these to inflation could be used to mitigate further declines in real prices.

The Architecture of Compromise: Why CFOs Might Endorse a 100% Corporate Profit Tax, Repatriate Overseas Profits, Increase Dividends, and Reinvigorate U.S. Equity Capital Market Activity

This brief essay explores modes of compromise and how novel approaches can resolve an impasse. The debate on U.S. corporate tax policy is used as an example. Attempts by bitterly divided parties to compromise on ideological issues by “splitting the difference” can prove a fruitless exercise. That has certainly been the case with regard to U.S. federal tax policy in general and, specifically, with respect to the 9.0% of federal revenues derived from taxation of corporate profits. Some parties are inextricably committed to taxing corporate profits more heavily. Others are equally devoted to reducing the corporate profit tax burden. Efforts to have the parties “split the difference” have at best wrestled effective tax rates marginally up or down from time to time. For years, a stalemate unsatisfactory to all has festered. We observe that, when dealing with irreconcilably opposed parties, a compromise that “bridges the gap” holds more promise for progress than one that “splits the difference”. As applied to the U.S. corporate tax rate debate, lashing together proposals to i) raise the federal corporate tax rate to 100% and ii) allow 100% corporate deductibility of dividend payments might span the divide between those who call for higher corporate tax rates and those who call for lower ones. In a way, each side gets 100% of what it wants. A static analysis indicates such a package would increase corporate tax revenue to the federal government by 146.9%; a dynamic analysis indicates it would cut corporate tax revenue to the federal government by 53.1% but bring a host of important, secondary benefits some of which would result in substantial, additional federal tax revenues. Secondary benefits that might reasonably be foreseen include: • A decline in corporate stock buyback activity • Repatriation of overseas profits • Sharply higher U.S. equity capital markets financing activity • Higher after tax return on equity capital for U.S. investors • Improved governance through discouragement of corporate empire building.

(UNCONTROLLED) AGGREGATE SHOCKS OR VERTICAL TAX INTERDEPENDENCE? EVIDENCE FROM GASOLINE AND CIGARETTES

Besley and Rosen (1998) were the first researchers to test empirically for the presence of vertical tax externalities, examining the case of unit taxes on gasoline and tobacco. However, they did not take into account the price differences across states that arise because high cost areas pay less in real terms than low cost areas, since federal unit sales taxes on cigarettes and gasoline do not differ across states. Consequently, we propose that vertical tax competition can be estimated by using a federal tax variable that is expressed in real terms and thus shows crosssectional variation across states. To estimate real prices we deflate all financial variables using the House Price Index (HPI), which is disaggregated by states. This empirical strategy enables us to disentangle the vertical interdependence between state and federal tax rates from aggregate shocks over time. We use U.S. data from 1975-2006 on gasoline and tobacco taxes, and find significant horizontal tax competition, but no vertical tax reactions. The results are robust to the period analyzed.

The Behavioral Political Economy of Budget Deficits: How Starve the Beast Policies Feed the Machine

The notion of “starving the beast” has been an important justification for fiscal programs emphasizing revenue reductions since the mid-1970s. While the idea of restraining government spending by limiting government revenues has an intuitive appeal, there is convincing evidence the reducing federal tax rates without coordinated reductions in federal spending actually produces long-term growth in spending. This perverse result is explained by a theory of “fiscal illusion.” By deferring the costs of government services and benefits through deficit financing, starve the beast policies have the effect of lowering the perceived price of government in the minds of many citizens. We assess the principal behavioral prediction of the fiscal illusion theory.Incorporating estimates of the effects of federal deficits into a standard substantive model of Stimson's mood index, we find strong support for a subjective price-driven theory of demand for government. In particular, we find that the size of the federal budget deficit is significantly associated with greater demand for government services and benefits. This may have important implications for contemporary debates about fiscal discipline.

Fixing the Fiscal Imbalance: Turning GST Revenues Over to the Provinces in Exchange for Lower Transfers

The central argument of this paper is that Canada should better align provincial own-source revenues with provincial expenditures by turning over the GST to the provinces while simultaneously reducing federal transfers. The paper begins by broadly outlining of Canada's present fiscal arrangements and explains why a reduction of cash transfers and realignment of federal and provincial tax rates – in short, a transfer of tax points – would benefit the federation. It reviews past tax point transfers and then addresses the question of why transferring GST revenues is superior to other alternatives using the principles of tax assignment as the guide. It lays out two comprehensive proposals for transferring GST revenues, with the key difference being the way in which the GST transfer is equalized across provinces. It shows the impact on Ottawa and the provinces of these two proposals for the 2009-2010 fiscal year. It highlights the benefits of these changes from a federal, provincial and taxpayer perspective with a special focus on one of Canada's major expenditure challenges – what to do about public health spending.

Budget Deficits and Demand for Government: How Starve the Beast Policies Feed the Machine

The notion of starving the beast' has been an important justification for programs emphasizing revenue reductions since the mid-1970s. While the idea of restraining government spending by limiting government revenues has an intuitive appeal, there is convincing evidence the reducing federal tax rates without coordinated reductions in federal spending actually produces long-term growth in spending. This perverse result is explained by a theory of fiscal illusion.'' By deferring the costs of government services and benefits through deficit financing, starve the beast policies have the effect of lowering the perceived price of government in the minds of many citizens. We assess the principal behavioral prediction of the illusion strategy. Incorporating estimates of the effects of federal deficits into a standard substantive model of Stimson's mood index, we find strong support for a subjective price-driven theory of demand for government. In particular, we find that the size of the federal budget deficit is significantly associated with greater demand for government services and benefits.

Adopting the More Likely than Not Standard for Tax Returns

Under current law, a taxpayer may generally take a tax return position without penalty or disclosure if there is substantial authority that the position will be sustained if challenged. Taxpayers can therefore take positions that they believe are unlikely to be right, but might be. The disclosures under Financial Accounting Standards Board Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes,’’ show that companies have failed to pay billions of dollars of taxes they think are legally owed according to their tax returns. A country needing tax revenue should collect the taxes that are rightfully owed before it seeks to raise additional taxes, and the FIN 48 disclosures reveal billions of dollars lost to noncompliance. This proposal would require taxpayers to report on their tax return only positions that they believe are more likely than not correct. With this new higher standard, the tax system could rely on financial reporting standards to better enforce compliance with the tax law. For a more detailed discussion of this proposal, please see ‘‘Voluntary Compliance: This Return Might Be Correct, but Probably Isn’t,’’ in the spring 2010 issue of the Virginia Tax Review.The proposal is made as a part of the Shelf Project, a collaboration among tax professionals to develop and perfect proposals to help Congress raise revenue without raising tax rates. The deficit is now at $1.6 trillion or 11.2 percent of GDP, and government debt is projected to increase to 68 percent of GDP by 2019. In an impending revenue crisis, base-protecting revenue provisions that are ordinarily politically impossible become political necessities. Tax rates can’t be raised on this loophole-ridden tax base. Shelf Project proposals defend the tax base and improve the rationality and efficiency of the tax system. They are intended to raise revenue without raising rates, because the best tax systems have the broadest possible base to reach the lowest feasible tax rates. Shelf Project proposals are intended to eliminate the alternatives of 85 percent individual income tax rates or 35 percent federal sales tax rates. Alonger description of the Shelf Project and an inventory of its proposals after two years may be found at ‘‘Two Years of the Shelf Project,’’ Tax Notes, Jan. 25, 2010, p. 513, Doc 2010-150, or 2010 TNT 17-12.

An economic analysis of oil sands mining options

Mining projects normally involve huge levels of capital outlay with their attendant high investment risks. Thus, all new mining projects and existing projects have to be economically evaluated to assess their viabilities and whether they add value to the company’s portfolio. Economic analysis is one of the best tools for evaluating and comparing different projects or investments options. Various economic evaluation criteria such as the Net Present Value, Profitability Index, Internal Rate of Return and Discounted Payback Period are commonly used, alone or in combination, to determine the acceptability or attractiveness of projects and to aid in the selection of the best investment ventures from a number of options. In this paper, economic, risk and sensitivity analyses were conducted on two oil sands mining options at Syncrude Mine in Canada. These are the Current Mining System (CMS) and the Cyclic Excavator Conveyor Belt Control System (CycEx CBCS). The results of detailed economic analysis show that the net present value (NPV) of the CMS option is $3.20 ´ 1010 while that for the CycEx CBCS option is $4.06 ´ 1010. The profitability indices for the CMS and CycEx CBCS options are 19.37 and 43.37 respectively. The internal rates of return of the CMS and CycEx CBCS options were calculated to be 29.02% and 33.37% respectively. Both the CMS and CycEx CBCS options have very short discounted payback periods (≤ 0.27 years). The results of risk characterisation of the two mining options show that there is 85% probability that the NPVs of the CMS and CycEx CBCS options will be greater than $2.69 ´ 1010 and $3.42 ´ 1010 respectively. The results of sensitivity analysis show that the input variables that significantly affect the NPV in both mining options are the discount rate, production rate, oil price, exchange rate, and the federal and provincial tax rates. In general, changes in input parameters such as discount rate, scheduled mine production capacity and time, price of oil per barrel and total operating costs had lower effects on the NPV of the CycEx CBCS option than the CMS option. The calculated economic parameters together with the results of the risk and sensitivity analyses show that the CycEx CBCS option is more economically viable than the CMS option.

Using Financial Accounting Data to Examine the Effect of Foreign Operations Located in Tax Havens and Other Countries on U.S. Multinational Firms' Tax Rates

ABSTRACTThis paper investigates the effect tax havens and other foreign jurisdictions have on the income tax rates of multinational firms based in the United States. We develop a new regression methodology using financial accounting data to estimate the average worldwide, federal, and foreign tax rates on worldwide, federal, and foreign pretax book income for a large sample of U.S. firms with and without tax haven operations. We find that on average U.S. firms that disclosed material operations in at least one tax haven country have a worldwide tax burden on worldwide income that is approximately 1.5 percentage points lower than firms without operations in at least one tax haven country. Our results also show that U.S. firms face a 4.4% current federal tax rate on foreign income whether or not they have tax haven operations. Finally, we find that U.S. firms with operations in some tax haven countries have higher federal tax rates on foreign income than other firms. This result suggests that in some cases, tax haven operations may increase U.S. tax collections at the expense of foreign country tax collections.

Using Financial Accounting Data to Examine the Effect of Foreign Operations Located in Tax Havens and Other Countries on US Multinational Firms' Tax Rates

This paper investigates the effect tax havens and other foreign jurisdictions have on the income tax rates of multinational firms based in the United States. We develop a new regression methodology using financial accounting data to estimate the average worldwide, federal, and foreign tax rates on worldwide, federal, and foreign pre-tax income for a large sample of US firms with and without tax haven operations. We find that on average US firms that disclosed material operations in at least one tax haven country have a worldwide tax burden on worldwide income that is approximately 1.5 percentage points lower than firms without operations in at least one tax haven country. Our results also show that US firms face a 4.4 percent current federal tax rate on foreign income whether or not they have tax haven operations. Finally, we find that US firms with operations in some tax haven countries have higher federal tax rates on foreign income than other firms. This result suggests that in some cases, tax haven operations may increase US tax collections at the expense of foreign country tax collections.

THE REDISTRIBUTIVE IMPACT OF ALTERNATIVE INCOME MAINTENANCE SCHEMES: A MICROSIMULATION STUDY USING SWISS DATA

Taking a benchmark scenario, the current situation in Switzerland, and using a microsimulation technique, we compare the effectiveness of various income maintenance schemes for reducing inequality and poverty. A full negative income tax allowance designed to eliminate poverty is shown to reduce income inequality most drastically. An integrated federal linear tax rate of 62 percent is required to make it viable. Aggregate work hours are reduced by approximately 10 percent and average disposable income falls by 9.3 percent under such circumstances. A participation income restricted to adults in employment and covering 50 percent of subsistence costs is however shown to result in an unambiguous social welfare improvement over the current situation in Switzerland.