Finance Economists Research Articles

The Evolution of Modern Capital Structure Theory: A Review

Capital structure has been one of the most controversial and debatable topics in corporate finance theory since the birth of Modigliani and Miller’s (MM) first capital structure irrelevancy theory in 1958. Following MM’s (1958) first quantitative theorem, several finance economists and scholars across the globe have theorized and empirically investigated to clarify the nature of corporate capital structure and the impact of a firm’s capital structure decision on its value and financial performance. This review article briefly overviews the evolution of modern capital structure theory in the corporate finance literature, from its classical root (MM capital structure irrelevance theory) to its recent development (BFO theory). The paper compares and contrasts the arguments of invaluable theoretical papers to comprehend the strengths and weaknesses of each theory. The review indicates that there is no universal capital structure theory that comprehensively explains the real-world financing behavior of firms and the capital structure-firm performance nexus. In other words, the capital structure puzzle is still unsolved in corporate finance literature.

Transforming the supplementary table on pension liabilities (Table 29) into an actuarial balance sheet

IMPACT For policy-makers, statisticians, public accountants, social security actuaries, public finance economists and other stakeholders, the regulation introduced by the EU regarding the disclosure of an accrued-to-date liability (ADL) table (Table 29) is a valuable first step in reporting pension liabilities. However, the information disclosed is incomplete and does not provide an indicator of solvency or sustainability. In addition, pensioners and those making contributions to pensions have no information regarding the security of their future benefits. In this timely article, the authors present a methodology to easily transform Table 29 into an actuarial balance sheet (ABS) and compile its associated income statement (IS). The ABS can be used to assess the solvency of pension schemes, whereas Table 29 cannot.

From Each According to Their Ability? An Analysis of Endowment Taxation and Potential Earnings

AbstractThis Article examines ability taxation, which is a tax on a person’s earning ability or potential earnings, rather than earned income. Despite this regime’s longstanding favor as a theoretical ideal for fair and efficient taxation among public finance economists, certain political philosophers, and tax law scholars, insufficient effort has been made to provide an analysis of what ‘potential earnings’ means. This Article explores competing understandings of this notion, and situates them within a multipart taxonomy. In so doing, it unearths a tension at the core of the ability tax program involving a fundamental misalignment between the metaphysics (or correct conceptual analysis) of potential earnings and the economics of its taxation. It concludes that once we correctly understand its requirements, we should reject ability taxation as the first-best normative ideal it has been held out to be on the grounds that it is overly burdensome and unfair to certain individuals.

Public Finance and Racism

Mainstream public finance research has largely ignored race issues. This paper calls on public finance economists to explore racial issues more extensively. The obvious reasons are to understand th...

A snapshot of public finance research from immediately prior to the pandemic: IIPF 2020.

As the COVID-19 pandemic has shaped public policies and government finances, it has also influenced the topics that public finance economists are researching. Because the 2020 International Institute of Public Finance Congress featured papers that were submitted prior to the start of the pandemic, the Congress allows us to reflect on the state of research prior to the pandemic’s shock to both fiscal policies and our worldview. In this article, the Editors of International Tax and Public Finance reflect on interesting papers that were presented at this internationally representative conference in public economics. The exercise provides insight on where the field of public economics was heading prior to the pandemic and will provide a yardstick to see how the field evolves in the coming years afterward.

Designing international tax reform: lessons from TCJA.

The Tax Cuts & Jobs Act (TCJA) introduced the most significant changes to the US international tax system in decades. The law changes have been criticized for reducing equity, benefiting wealthier business owners at the expense of individuals in the long term (while also increasing the deficit) adding to complexity, and creating incentives for shifting profits and activities offshore. These critiques give rise to the question of how best, and under what criteria, to evaluate the changes to the international tax system brought about by the US tax reform. This paper analyzes the tax law changes adopted in the TCJA that impact cross-border investment within the context of several decades of policy proposals that recognized the flaws and deficiencies of the prior system and attempted to develop proposals that balanced creating incentives for the efficient use of capital and the benefits of US investment overseas while minimizing incentives for profit shifting. Reviewing the various provisions of the law in the context of a series of reform proposals made over the previous decade shows the extent to which most of the international law changes introduced by the TCJA closely followed these well-developed ideas. And yet, there appears to be a disconnect between the goals of the law change and the extent to which the laws as enacted have effectuated that change. The divergence provides a cautionary tale for public finance economists wishing to engage in international tax regime change.

A Snapshot of Public Finance Research from Immediately Prior to the Pandemic: IIPF 2020

As the COVID-19 pandemic has shaped public policies and government finances, it has also influenced the topics that public finance economists are researching. Because the 2020 International Institute of Public Finance (IIPF) Congress featured papers that were submitted prior to the start of the pandemic, the Congress allows us to reflect on the state of research prior to the pandemic’s shock to both fiscal policies and our worldview. In this article, the Editors of International Tax and Public Finance (ITAX), reflect on interesting papers that were presented at this internationally representative conference in public economics. The exercise provides insight on where the field of public economics was heading prior to the pandemic and will provide a yardstick to see how the field evolves in the coming years.

Rebellion, Rascals, and Revenue: Pleasingly Gaudy and Preposterous

Michael Keen and Joel Slemrod’s REBELLION, RASCALS AND REVENUE: TAX FOLLIES AND WISDOM THROUGH THE AGES (Princeton University Press, 2021) is a wonderful book, which should be read by any student of taxation. To most tax policy makers and academics, tax history may seem a bit arcane, because they believe that the study of taxation and especially public finance economics is a story of progress and that we know better how to design good tax systems than our ancestors. To this attitude, Keen and Slemrod offer a decisive rejoinder: We do not necessarily understand taxation better than our predecessors, and in fact we can learn from their experience. Keen and Slemrod’s marvelous book is not an attempt to directly effectuate tax policy or to rewrite tax history. Instead, it is a very wise excursion by two highly experienced public finance economists into the past in order to both understand the present better by comparing it to what was different, and to improve the future by learning from both past wisdom and past follies.

The Implementation of Islamic Corporate Governance (ICG) on Sharia Banking in Indonesia

In 2001, a financial institution in Turkey went bankrupt. The financial institution is "Ihlas Finance House". The cause of the bankruptcy of financial institutions according to Islamic finance economists is as a result of weaknesses in the internal and external mechanisms of corporate governance. The purpose of writing this article is to find out how the implementation of Islamic Corporate Governance in Islamic Banking. The method used in this article to answer the research question is a literature study. The results of this study indicate that Islamic banking financial institutions in Indonesia have not fully implemented Islamic Corporate Governance (ICG). The implementation of Islamic Corporate Governance (ICG) that has not been fully implemented is sharia compliance (syari'ah compliance). Sharia compliance in Islamic bank financial products. Conclusion of this article: 1. Implementation of Islamic Corporate Governance (ICG) in Islamic banking is accommodated in the Sharia Banking Law and Bank Indonesia Regulations; 2. Islamic Corporate Government (ICG) can be seen from the establishment of Sharia Supervisory and Sharia Compliance Board in Islamic banking; and 3. Islamic banking in Indonesia does not yet fully implement Islamic Corporate Governance (ICG) in sharia compliance for Islamic financial products.

The Causalities of the Tax Incidence and the Modeling of Tax Processes

Taxation is at the heart of citizens’ relationship with the State. Taxes have significant effect on individual population groups, and become an important political tool as well. Nevertheless, although most countries have adopted similar principles for the operation of their tax system, there remain many differences in the way it is implemented. There are a number of variations in the application of value added taxes and other consumption taxes, including different interpretation of the same or similar concepts. This article is focused on the analysis of the opinions of different groups of inhabitants on the size of the value added tax, on the size of the real estate tax, on the issue of complicated system with lots of exceptions, and on the issue of frequent changes in taxes. The analyzed issue is a part of a broader context which has been solved within the project of specific research conducted by the team from the Department of Economics, Faculty of Informatics and Management, University of Hradec Králové, called “The Causalities of Tax Incidence and the Modeling of Tax Processes”. This project follows another project of specific research called “The Causalities of Tax Incidence”, while the data from this project have been used for the analysis within this article.Most public finance economists acknowledge that nominal tax incidence is not necessarily identical to actual economic burden of the tax, but disagree greatly among each other on the extent to which market forces disturb the nominal tax incidence of various types of taxes under various circumstances.

The Mirrlees Review and the State of Public Economics

The Mirrlees Review of taxation in the United Kingdom is a landmark in the analysis of U.K. fiscal policy, and of wide interest to public finance economists around the world. This review concentrates on what we can learn from the Review about the current state of public economics and directions for future research. (JEL E62, H20, H50)

The Incidence of Bank Regulations and Taxes on Wages: Evidence from US States

Banks and the financial sector have come under increased scrutiny since the 2008 financial crisis. Regulations concerning the banking sector have been re-written and there have been calls for increased taxation of banks (as companies) and the remuneration of bankers. In general, two sorts of taxes are commonly mentioned, taxes on the profits of banks and taxes on bank wages. As the corporate tax may be borne by labor, a natural question to ask is whether the economic incidence of these taxes really differs. The cost of regulations can also be passed on, but public finance economists typically ignore the incidence of regulations, a potentially important source of influence for banks. This paper focusses on two questions. First, we ask whether there is an earnings premium in the financial sector. Second, we examine the issue of tax and regulatory incidence by estimating the degree to which banking regulations and company taxes on banks influence wages in the banking sector. We use individual data on wages combined with data from US states on the states’ tax rates and timing of regulatory changes applied to financial corporations. We find (i) a raw 45% earnings premium in the financial sector; (ii) a negative effect of corporate tax on wages in the manufacturing sector but a positive or no effect on wages in the banking sector, and (iii) lower wages in the banking sector in states that de-regulated earlier. The tax incidence result is somewhat surprising though it is consistent with Huizinga, Voget, and Wagner (2011), who find that home country corporate income taxation of foreign-source bank income is almost fully passed through to higher interest margins charged abroad. The result may have to do with specifics of the banking industry such as market power, labor mobility, or inelastic demand and elastic supply of banking services.

From Programmatic Reform to Social Science Research: The National Tax Association and the Promise and Perils of Disciplinary Encounters

This article uses the history of the National Tax Association (NTA), the leading twentieth-century organization of tax professionals, to strengthen our empirical understanding of the disciplinary encounter between law and the social sciences. Building on existing sociolegal scholarship, this article explores how the NTA embodied tax law's ambivalent historical interaction with public economics. Since its founding in 1907, the NTA has changed dramatically from an eclectic and catholic organization of tax professionals with a high public profile to an insular, scholarly association of mainly academic public finance economists. Using a mix of quantitative and qualitative historical evidence, we contend that the transformation in the NTA's mission and output can be explained by the increasing professionalization and specialization of tax knowledge, and by the dominant role that public economics has played in shaping that knowledge. This increasing specialization allowed the NTA to secure its position as a bastion of scholarly tax research. But that achievement came at a cost to the organization's broader civic mission. This article is thus a historical account of how two competing professional disciplines—tax law and public economics—have interacted within a particular organizational field, namely the research and analysis of tax law and policy.

Beyond Samuelson's Chapter on Ramsey

Paul Samuelson proposed and practiced a program for the Whig history of economics. One such example is his account of Frank Ramsey's contribution to optimal taxation in 1927. For him and mainly for the public finance economists who rediscovered later Ramsey's contribution, Ramsey was a genius ahead of his time who used a mathematics too advanced for his contemporaries and was rediscovered only in the 1970s, when economists became more mathematically literate. In such rediscovery, a memorandum that Samuelson wrote in 1951 for the US Treasury became central. I examine Samuelson's account and the historical context of the emergence of the optimal taxation literature in the 1970s in which Ramsey was canonized.

Is past prologue? Prospects for state and local sales tax bases

General sales taxes provide substantial fractions of state and local revenues in the US. However, state and local sales tax bases have been eroding steadily during the past 50 years. Base erosion contributes to fiscal stress in the states; therefore, prospects for continued sales tax base erosion are important to state tax administrators, policymakers and public finance economists. This article offers a quantitative assessment of base erosion. We construct time series of a representative state sales tax base and its price index, and estimate a structural demand system for ‘taxed’ and ‘untaxed’ commodities. We use the estimates to forecast the sales tax base over coming years. Time-series forecasts and a weighted-average forecast are constructed, to reduce the likelihood of forecast error. The results suggest slow, but relentless, base erosion and possible recurring fiscal stress, in states where sales tax revenues make up sizable fractions of total tax revenues.

Models of the Actuarial Balance of the Pay-As-You-Go Pension System: A Review and Some Policy Recommendations

This paper reviews the two main methods used by government Social Security departments to draw up the socalled actuarial balance of the p ayasyougo pension system, focusing especially on results, methodology and actuarial issues. The specific models studied are those in the United States, Japan and Sweden, and their main differences and similarities are highlighted. The authors make some specific policy recommendations that would be of interest to public finance economists, social security actuaries and policy makers, and they suggest that international organizations (ISSA, the World Bank, the OECD and others interested in public pension reform) could be supportive in developing and enforcing international accounting and actuarial valuation standards for payasyougo pension systems

Lessons for Tax Policy in the Great Recession

While policymakers struggle with identifying and enacting the appropriate short-term policy response to the financial crisis and economic downturn of '2008, 2009, and perhaps beyond, both academics and policymakers are examining the causes of the crisis and what lessons this might bring to bear on longer-term policy. In this paper, I offer some speculations about the lessons for tax policy, and the analysis of tax policy, from the Great Recession. What did we get wrong? What did we underestimate the importance of? What do we need to think more about? One conclusion is that public finance economists need to better integrate the economic analysis of taxation with the concerns and expertise of macroeconomists, finance economists, and accountants. This is especially important for obtaining a better understanding of financial institutions, whose behavior is affected by the tax, accounting, and regulatory rules they face, rules that are inter-related but not coordinated.

Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?

Goyal and Welch (2007) argue that the historical average excess stock return forecasts future excess stock returns better than regressions of excess returns on predictor variables. In this article, we show that many predictive regressions beat the historical average return, once weak restrictions are imposed on the signs of coefficients and return forecasts. The out-of-sample explanatory power is small, but nonetheless is economically meaningful for mean-variance investors. Even better results can be obtained by imposing the restrictions of steady-state valuation models, thereby removing the need to estimate the average from a short sample of volatile stock returns. (JEL G10, G11) Towards the end of the last century, academic finance economists came to take seriously the view that aggregate stock returns are predictable. During the 1980s, a number of papers studied valuation ratios, such as the dividend-price ratio, earnings-price ratio, or smoothed earnings-price ratio. Value-oriented investors in the tradition of Graham and Dodd (1934) had always asserted that high valuation ratios are an indication of an undervalued stock market and should predict high subsequent returns, but these ideas did not carry much weight in the academic literature until authors such as Rozeff (1984), Fama and French (1988), and Campbell and Shiller (1988a, 1988b) found that valuation ratios are positively correlated with subsequent returns and that the implied predictability of returns is substantial at longer horizons. Around the same time, several papers pointed out that yields on short- and long-term treasury and corporate bonds are correlated with subsequent stock returns (Fama and Schwert,1977;KeimandStambaugh,1986;Campbell,1987;FamaandFrench, 1989).

Trade Policy Reform and the Missing Revenue†

In many African countries, large discrepancies exist between revenues implied by published tariff rates multiplied by estimated import volumes and actual receipts. We develop a stylised trade model where average and marginal tariff rates diverge and incorporate insights from this model into a computable general equilibrium model of an African economy (Mozambique) to study the implications of trade policy reform. Model simulations indicate that lowering tariff rates and reducing duty-free importation in a manner that maintains official revenue benefit nearly everyone. The main exception is those who benefited from duty-free imports in the base.

Divergent Views on the Coming Dollar Crisis

Is the U.S. vulnerable to a full-blown dollar crisis? Why are international finance economists scared and jittery, but domestically-oriented macroeconomists much less concerned?