Implications For Tax Policy Research Articles

Recent research on labor supply: Implications for tax and transfer policy

Most work in optimal tax theory relies on simple labor supply models that fail to incorporate insights from the modern labor supply literature. As a result, it may have reached misleading conclusions regarding the optimal tax structure. The recent work on labor supply that I review here emphasizes human capital investment and the participation margin. When the data is viewed through the lens of models that account for these features, it implies labor supply is more elastic than conventional wisdom suggests. Recent work also stresses how elasticities vary by age, education, gender and marital status. Here I explore the implications of these recent developments in the labor supply literature for the optimal design of the tax system. I also review some recent work in the optimal tax literature that does utilize more sophisticated labor supply models, and discuss how incorporating those features influences optimal tax calculations.

Hybrid Platform Model

We provide a canonical and tractable model of a trade platform enabling buyers and sellers to transact. The platform charges a percentage fee on third-party product sales and decides whether to be hybrid, like Amazon, by selling its own product. It thereby controls the number of differentiated products (variety) it hosts and their prices. Using the mixed market demand system, we capture interactions between monopolistically competitive sellers and a sizeable platform product. Using long-run aggregative games with free entry, we endogenize seller participation through an aggregate variable manipulated by the platform's fee. We show that a higher quality (or lower cost) of the platform's product increases its market share and the seller fee, and lowers consumer surplus. Banning hybrid mode benefits consumers. The hybrid platform might favor its product and debase third-party products if the own product advantage is sufficiently high. We also provide some tax policy implications.

The welfare implications of housing-related tax policies in China

This paper investigates the welfare implications of two housing-related tax policies in China, the property tax and the implicit residential land tax. We use a general equilibrium model with distorted land markets and households differing in home ownerships, asset holdings, and incomes. We find that the implicit residential land tax causes a larger social welfare loss than the property tax. The social welfare loss is due to the exacerbation of land misallocations and more significantly the rising of rents that disproportionally hurts the poor renters. Our findings thus imply that the currently imposed implicit residential land tax in China should be replaced by the conventional property tax.

Tax policy implications for a two‐engine growing economy

AbstractIn an endogenous growth model with two engines of R&D and capital, we investigate the environment of “inclusive growth” for tax reallocations (tax increases or tax credits) to gain broader benefits in terms of promoting the overall GDP growth without an increase in income inequality. Our results show that a tax increase in the capital‐good sector can result in inclusive growth, boosting overall growth and reducing income inequality, provided that the status quo tax rate is not too high. Surprisingly, tax credits are not able to achieve such inclusive growth. While the GDP growth rises, a tax credit in the R&D sector not only increases income inequality but also decreases the aggregate employment, if the labor mobility cost between the final‐good and R&D/capital‐good sectors is relatively low. This provides a caution to policymakers given the fact that research tax credits have served as a common incentive to strengthen the R&D environment.

Implications of tax policy for innovation and aggregate productivity growth

We examine the quantitative implications of income taxation for innovation and aggregate productivity growth within the context of a dynamic stochastic general equilibrium model of innovation-led growth. In the model, innovation comes from entrants creating new products and incumbents improving own existing products. The model embodies key features of the U.S. government sector: (i) an individual income tax with differential treatment of labor income, dividends, and capital gains; (ii) a corporate tax; (iii) a consumption tax; (iv) government purchases. The model is restricted to fit observations for the post-war U.S. economy. Our results suggest that endogenous movements in aggregate productivity and endogenous market structure play a quantitatively important role in the propagation of tax shocks.

Taxation as a Barrier to Blockchain Innovation

Though it is not the only cryptocurrency in circulation, Bitcoin has been one of the dominant and more highly valued digital currencies in the blockchain family. The IRS recently decided to treat Bitcoin and all other cryptocurrencies as property, thus causing ownership interests in these cryptocurrencies to generate a taxable transaction any time they are sold or traded for another good or service. We argue that taxation of cryptocurrencies and the recordkeeping necessities that come with it serve to inhibit the innovation in and growth of what could be an extremely valuable new commodity, the blockchain itself. We offer alternative strategies to mitigate the potential effects of these types of regulatory tax policies. Our work is the first to offer an analysis of the implications of tax policies on the development of blockchain technologies.

Tax avoidance through securitization

Employing a unique hand-collected sample of 956 credit risk securitization transactions issued by 64 stock-listed European banks across the EU-13 plus Switzerland over the period from 1997 to 2010, this paper empirically analyzes the impact of securitization on the issuing banks’ effective tax rates. Our analysis reveals that banks may reduce their tax expense through securitization via a direct and indirect channel suggesting that tax avoidance may be a further motive for banks to engage in the securitization business. These baseline findings remain robust under various robustness checks, especially when implementing structural equation models and controlling for a reverse causality between the banks’ tax burden and their incentive to securitize. Finally, various sensitivity analyses provide further important results and implications for tax policies, banking regulation and the ongoing process of revitalizing the European securitization market.

We are what we eat: Obesity, income, and social comparisons

Abstract The empirical evidence of a non-monotone relation between income and obesity is not well explained. We build a theoretical model combining income inequality and social comparisons to explain the link between income and obesity and study tax policy implications for fighting obesity. We assume that differences in food consumption patterns between poor and wealthy households partly reflect positionality, which is the concern for social status. Our key assumption is that positionality for low-calorie food consumption is positively related to a country’s wealth. In this framework, body weight outcomes reflect competing income and positionality effects, yielding the following results. We explain the link between average obesity rates, and standards of living and suggest the existence of a Kuznets curve for obesity, in accordance with empirical evidence. For cross sections of the population, we explain the observed correlation between income and obesity, which is positive in poor countries, and negative in rich countries. We find that increasing the relative cost of high-calorie food is less effective at decreasing the relative weight of poor individuals in rich countries than in poor countries.

Perceptions of Tax Compliance by SMEs and Tax Practitioners in New Zealand: A Divergent View?

Despite the economic importance of small and medium enterprises (SMEs), little is known about their tax compliance perceptions, which may influence their compliance behavior. This is particularly so in relation to comparing the tax perceptions of New Zealand SMEs and their tax practitioners. This article reports on a qualitative study which examined the tax compliance perceptions of New Zealand SMEs and their tax practitioners. The findings of this study reveal that SMEs’ perceptions of tax compliance are multifaceted and include legal factors, compliance costs, economic considerations and perceptions of “others”. On the other hand, tax practitioners generally have a narrow context focusing mainly on compliance cost and legal obligations. The tax policy implications from this study include that it can potentially assist tax authorities to design and implement strategies to influence SMEs’ compliance behaviors. Also, for tax practitioners it illustrates their important role in reducing the stress of their SME clients by assisting them through education, including how to use accounting reports for compliance and business control purposes.

U.S. Firms’ Aversion to Inversions

We investigate how U.S. multinationals’ pre-2018 capital structure and tax planning actions were affected by potential repatriation taxes. We construct a proxy for exogenous changes to repatriation tax rates and find it is positively associated with bond issuance and debt ratios, but only in repatriation-tax-sensitive multinationals. These results are concentrated in firms with lower costs of debt capital. While multinationals were more likely to pursue tax-free repatriation techniques after repatriation tax increases (we provide several examples of these complex, lesser-known techniques), we find little evidence of increased inversion likelihood. Our findings have important implications for current and proposed tax policies.

Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy

We study the effect of state-level estate taxes on the geographical location of the Forbes 400 richest Americans and its implications for tax policy. We use a change in federal tax law to identify the tax sensitivity of the ultra-wealthy's locational choices. Before 2001, some states had an estate tax and others didn't, but the tax liability for the ultra-wealthy was independent of their domicile state due to a federal credit. In 2001, the credit was phased out and the estate tax liability for the ultra-wealthy suddenly became highly dependent on domicile state. We find the number of Forbes 400 individuals in estate tax states fell by 35% after 2001 compared to non-estate tax states. We also find that billionaire's sensitivity to the estate tax increases significantly with age. Overall, billionaires' geographical location appears to be highly sensitive to state estate taxes. We then estimate the effect of billionaire deaths on state tax revenues. We find a sharp increase in tax revenues in the three years after a Forbes billionaire death, totaling $165 million for the average billionaire. In the last part of the paper, we study the implications of our findings for state tax policy. We estimate the revenue costs and benefits for each state of having an estate tax. The benefit is the one-time tax revenue gain when a wealthy resident dies, while the cost is the foregone income tax revenues over the remaining lifetime of those who relocate. Surprisingly, despite the high estimated tax mobility, we find that the benefit exceeds the cost for the vast majority of states.

Trends in and Correlates of Use of Roll-Your-Own Cigarettes: A Population Study in England 2008–2017

Understanding the use of cheaper roll-your-own (RYO) cigarettes may have implications for tobacco tax policy. We examined trends in RYO cigarette use in England between 2008 and 2017, and characterized users' sociodemographic and smoking profiles. We used data from 211 469 respondents to a survey representative of the adult (≥16 years) population. In current smokers across the entire study period (n = 43 389), we assessed multivariable associations between cigarette type (RYO or factory-made [FM]) and sociodemographic and smoking characteristics. Among current smokers in 2008 and 2017 (n = 7685), we tested interactions between year and cigarette type to assess the stability of each characteristic. Between 2008 and 2017, FM cigarette use declined from 15.3% to 9.2% whereas RYO use increased from 6.7% to 8.1%. Greater odds of RYO use were observed among younger, male smokers from lower social grades, who were more addicted and used electronic cigarettes (ORrange = 1.28-1.86, p < .001). Lower odds of RYO use were observed among nondaily smokers, those with high motivation to stop, and higher spending on smoking (ORrange = 0.46-0.89, p ≤ .001). The RYO smoker profile was relatively stable between 2008 and 2017. However, compared with FM use, RYO use increased in younger (p < .001) and female (p = .019) smokers, and there was a relatively smaller decline in the proportion cutting down or trying to quit (p = .004). In England, RYO use increased when overall smoking prevalence and FM use decreased. The profile of RYO smokers remained relatively stable, with users typically younger, male, more addicted, deprived, spending less on smoking, and less inclined to quit than FM smokers. This population-based study provides novel insight into recent trends in RYO use in England, providing an up-to-date understanding of the profile of RYO smokers. Without the consistent application of tax across the range of combustible products, smokers who are more dependent are able to capitalize on the lower cost of RYO in order to continue smoking, undermining the potential benefit of taxation on cessation.

State-level implications of federal tax policies

The United States federal fiscal policy has differential impact across states. We construct a new quarterly state-level dataset that we use to analyze the impact of unexpected changes in federal personal and corporate income taxes. We find substantial heterogeneity across states, with more than half having no significant response to the tax cuts. In addition, less capital intensive states have larger responses to corporate tax cuts. Although puzzling in standard models, a model with corporate and non-corporate sectors is consistent with this evidence. Overall, our results suggest the importance of variation and reallocation across states in evaluating federal policy.

State-level implications of federal tax policies: Comments

This note provides comments on the contribution by Chang Liu and Noah Williams in this issue.

Business Taxation in an Emerging Economy: Analysing Corporate Tax Incidence

This paper estimates the incidence of corporate taxes in an emerging economy &amp;ndash;India- using the data from 5,666 business firms listed in the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE) for the period 2000-15. Using the dynamic panel models, we find that capital bear the burden of corporate taxation relatively more than the labour. Our findings highlight that the effective tax rate is higher for the small corporate firms than the gigantic firms. The tax policy implications for strengthening the wage bargaining frameworks is insignificant as we found the wage determination in India is mostly outside the purview of fiscal policy practices. Further research is required to understand whether less incidence of corporate taxation on wages in India is due to base erosion and profit shifting.

Taxing Where Value Is Created: What’s ‘User Involvement’ Got to Do with It?

According to the OECD and the EU Commission, profits should be taxed ‘where value is created’. A commonly accepted definition of the term ‘value creation’ is so far lacking, however. This article offers a pragmatic and contextualized analysis of the new ‘value creation’ paradigm and examines its implications for international tax policy in the era of digitalization. In particular, it critically discusses the role of users that are said to contribute to value creation, for example by forming valuable networks, providing data or posting online content. The authors reject the argument that, due to user involvement in a firm’s value creation, the location of user groups and networks should give rise to taxation rights. They conclude that a better option is to recalibrate the international tax system based on the concept of sustained user relationships (SURE) which aligns itself with the rationale of a consistently defined notion of ‘value creation’.

Corporate Income Tax in the EU, the Common Consolidated Corporate Tax Base (CCCTB) and Beyond: Is it the Right Way to Go?

This working paper reviews key elements of the debate around the Commission’s proposals to tackle the problem of low effective tax rates for multi-national companies by instituting a Common Corporate Tax Base (CCTB). The paper begins with a non-technical discussion of the main issues, including earlier OECD and G20 proposals, and their implications for European tax policy. It then discusses the relevance of the CCTB proposal and considers to what extent it could provide a comprehensive solution for the main issues at stake.

Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy

We study the effect of state-level estate taxes on the geographical location of the Forbes 400 richest Americans and its implications for tax policy. We use a change in federal tax law to identify the tax sensitivity of the ultra-wealthy?s locational choices. Before 2001, some states had an estate tax and others didn?t, but the tax liability for the ultra-wealthy was independent of their domicile state due to a federal credit. In 2001, the credit was phased out and the estate tax liability for the ultra-wealthy suddenly became highly dependent on domicile state. We find the number of Forbes 400 individuals in estate tax states fell by 35% after 2001 compared to non-estate tax states. We also find that billionaires? sensitivity to the estate tax increases significantly with age. Overall, billionaires? geographical location appears to be highly sensitive to state estate taxes. We then estimate the effect of billionaire deaths on state tax revenues. We find a sharp increase in tax revenues in the three years after a Forbes billionaire death, totaling $165 million for the average billionaire. In the last part of the paper, we study the implications of our findings for state tax policy. We estimate the revenue costs and benefits for each state of having an estate tax. The benefit is the one-time tax revenue gain when a wealthy resident dies, while the cost is the foregone income tax revenues over the remaining lifetime of those who relocate. Surprisingly, despite the high estimated tax mobility, we find that the benefit exceeds the cost for the vast majority of states.

Tax Progressivity in Australia: Facts, Measurements and Estimates

We study the progressivity of Australia’s personal income tax system after the introduction of a New Tax System (Goods and Services Tax) Act 1999. We use two data sets: administrative data from Australian Tax Office (ATO) 2004-16 and survey data from the Household Income and Labour Dynamics in Australia (HILDA) survey 2001-16. We first document the distributions of income and tax liabilities, properties of the joint distributions of taxes paid and income, and discuss how taxes are varied across households and over time. We next provide estimates of tax progressivity using two approaches: one based on tax liability progression and one based on tax liability distribution relative to income distribution. The result obtained from the tax progression approach implies a significant decline in the average level of tax progressivity since 2004. Meanwhile, the result obtained from the tax distribution approach indicates a tax progressivity cycle with a modest decline up to 2006, then a sharp increase until 2010, and a slight decline thereafter. The personal income tax cuts for all taxpayers in early 2000s and the introduction of tax offset for low income earners (LITO) are main driving forces. Moreover, the evolution of income distribution and its interactions with bracket creep strongly affect the overall progressivity level of Australia’s income tax system. Hence, our findings provide new insights into the dynamics of income growth and tax progressivity, which has implications for tax policy debates in Australia.

I Robot: U Tax? Considering the Tax Policy Implications of Automation

In a 2017 interview, Microsoft founder Bill Gates recommended taxing robots to slow the pace of automation. Funds raised could be used to retrain and financially support displaced workers. Up to 47 per cent of US jobs are at risk by advancements in artificial intelligence. Low-wage workers currently hold a majority of those at-risk jobs. Increased automation is likely to exacerbate income inequality. While employment changes due to automation are not new, advances in artificial intelligence threaten to eliminate many more jobs than were eliminated historically through automation. Accelerated automation presents two problems: a revenue problem and a human problem. The revenue problem exists because the tax system is designed to tax labour more heavily than capital, as labour is less likely to be able to avoid taxation. Capital investment, on the other hand, is taxed more lightly because capital is mobile and can escape taxation. When capital becomes labour, as in automation, the bottom falls out of the system. The human problem is first that most people need income from working to survive. Some scholars have advocated for a governmentally provided universal basic income (UBI). Taxing robots could in theory provide revenue for a UBI, although any source of revenue would work just as well. While a UBI would solve the survival problem, humans need more than basic survival. In his classic work, psychologist Abraham Maslow listed survival as the foundation of his hierarchy of needs. Work satisfies the higher order needs of social identity and self-esteem. The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, significantly cut the US corporate tax rate, from 35 per cent to 21 per cent. In addition, TCJA increased tax benefits for purchasing equipment (which would include automation) by significantly enhancing bonus depreciation. The new tax legislation continued and deepened the existing tax bias towards automation. This article explores policy options for solving the revenue problem and the "jobs" problem, including a discussion and critique of UBI proposals and recommendations for other policy options, such as an enhanced earned income tax credit, incentives for employers, and reviving an idea from the Great Depression, the Civilian Conservation Corps.