Income Tax Cuts Research Articles

Under Treasury Control: Japan’s Emergence as an Egalitarian, Small-government State

This study analyses the formation of a policy system that reduced income inequality in Japan in the 1960s, a period of rapid economic growth. According to comparative research, the Japanese state is an example of small government with income equality. Japan’s income inequality rose in the 1950s, and at that point, the government faced a decision about how to reduce income inequality, and particularly whether to expand social security and government size. This study uses primary materials to analyse how and why Japan became more egalitarian while maintaining a small-government state, focusing on fiscal rules set by the Ministry of Finance, which adopted a balanced budget rule that prevented the issuance of public bonds and limited the tax burden ratio. As reflected in the government’s Income Doubling Plan, this development led to a trade-off among factors, such as social security, public works, and tax cuts, which led to the subordination of social security. Despite public debt issuance in 1965, which was contrary to two fiscal rules, social security did not expand because of fiscal rigidification. Throughout the 1960s, spending on public works and income tax cuts was prioritised over social security, resulting in small government but also income equality.

Business taxes, management delegation, and growth

We examine the interaction between agency issues and business taxation in a growth model with an endogenous market structure. Agency issues arise from two types of management delegation: day-to-day production and research and development (R&D) activities. We calibrate the model to the US economy. A reduction in profit tax fosters business dynamics, R&D investments, and income growth in the short and medium term but hampers long-term growth. Lower-quality governance dampens short-term income gains and amplifies long-term growth losses. Additionally, we compare the effects of profit tax cuts with those from dividend and executive income tax cuts. Our analysis includes a welfare and inequality evaluation of profit tax reforms.

Notching Foreign Equity Share with Corporate Income Tax Cuts

Notching Foreign Equity Share with Corporate Income Tax Cuts

Income Tax Cut and Firm Tax Avoidance

This study aims to examine the impact of Indonesian corporate income tax rate reduction on public companies’ tax avoidance. This study utilizes a quasi-experimental design with the difference-in-differences (DID) method to isolate the effect of corporate income tax rates changes on corporate tax avoidance behavior. Firms’ ownership structure is used to separate firms that are more likely to be affected by the tax law changes, thus representing the treatment group in the DID setting. Utilizing a sample of public companies listed on the Indonesia Stock Exchange in the 2019 and 2020 periods, this study finds that in the year preceding the tax rate reduction, firms with greater institutional ownership exercise higher tax avoidance compared to other firms. The differences, however, are not statistically significant, which may be caused by the short timespan between the policy announcement and tax filing period, limiting the time available for firms to adjust their tax avoidance behavior.
 Keywords: Tax Cut, Tax Avoidance, Institutional Investor

Does the Tax Cuts Policy Lower Firm Survival Risk? Evidence from China

This paper examines the effect of tax cuts policy on firm survival risk. We analyze a panel data of China’s listed companies over the period 20082021 based on two different techniques: Kaplan-Meier survival estimator and the Cox proportional hazards model. Our findings reveal that the tax cuts policy has positive and significant effect on improving firms’ survival probabilities. Moreover, compared with the income tax cuts, the value-added tax cuts play a more effective role on improving firms’ survival probability. By dividing firm locations into different regions, we also find that the tax cuts policy exerts a positive influence on firms’ survival probabilities in eastern region, while the positive effect in the central and western regions is relatively weaker. From the perspective of profitability heterogeneity, the results show that the beneficial effect from tax cuts policy on firm survival is more pronounced for firms with weaker profitability.

The Impact of Covid-19 on the Accounting Profession: Evidence from Accounting Professionals in A Developing Country.

The COVID-19 pandemic has been the center of attraction for the past four years. Its impact has been immense, affecting numerous sectors across the global economy including the Accounting Profession (AP). Consequently, the purpose of the study was to determine the impact of COVID-19 on the AP in Zambia. The collection of data was done through quantitative methods. Questionnaires in 5 point Likert scale were sent electronically to the ZiCA subscribed members through the ZiCA database., using purposive sampling. The collection of data comprised of 152 Accountants across the country. Data was analyzed through SPSS 26, Pairwise and Spearman’s RHO tests were used. The results indicate a significant relationship on remote inventory valuation both during and before COVID-19, indicating discrepancies on how inventory valuation was conducted, before and during the COVID-19 pandemic. Significant relationships between sector and challenges with inventory valuation during COVID-19; sector and evaluation of going concern in relation to COVID 19; sector and disclosure of accounting estimates and liabilities in relation to COVID-19; sector and adoption of cloud accounting, artificial intelligence, data analytics & forecasting and block chain during COVID-19; Job level and conducting of meeting using video conference, zoom, google meet during COVID-19; age and challenges faced for remote working during COVID-19. Insignificant relationships were tested between sector and inclusion of income tax cuts and subsidies in financial statements, education level and assessment of the Impact of COVID-19 related instability on revenue recognition and allowance for bad debts; sector and enhancement of accounting technology following COVID-19; job level and Increase of cyber security levels following COVID-19. The results concluded that COVID-19 has drastically affected inventory valuation, during the pandemic and how companies disclose and report all financial elements impacted by COVID-19. The study also concludes that COVID-19 has enabled the advancement of accounting technology, in the AP resulting in increase of cyber security levels. Companies and regulatory bodies should not ignore the impact of COVID-19 to the AP as the effects are long lasting and will continue in the long run post COVID-19.

Reregulating Indonesian Stock Buyback: A Lesson From United States

This article compares the corporate income tax cuts enacted by the Indonesian COVID-19 Relief Law and the US Tax Cuts and Jobs Act. It investigates the correlation between the tax cuts in the Tax Cuts and Jobs Act, economic development, and share repurchases in the US. It seeks to identify appropriate limitations on share repurchases in Indonesia following the enactment of the COVID-19 Relief Law. This research was carried out using the juridical normative method by tracing the literature and laws concerning share repurchase arrangements in Indonesia and the US. The results show that there is a slight positive correlation between the reduction of corporate income tax and economic development in the US and that the US income tax cuts have caused significant growth in share repurchases. After the enactment of the Indonesian COVID-19 Relief Law, which also reduced corporate income taxes, Indonesia may be on the verge of extensive share repurchase activity, as occurred in the US. To tackle this problem, we recommend amending Law No. 40 of 2007 concerning limited liability companies to re-regulate the restriction on share repurchases.

How Effective Is Tax Policy in Attracting Foreign Direct Investments in Transition Countries?

Foreign Direct Investments (FDI) has been considered an important source of economic growth and technological development in transition economies. The previous empirical literature has shown that FDI promote economic growth via complementary effects on domestic investments, increases in productivity and overall economic efficiency, giving rise to an increasing interest in understanding the key determinants of FDI. Apart from traditional FDI determinants, favourable tax policy has been considered an important factor influencing MNCs’ location decisions. The goal of this paper is to investigate the impact of corporate income tax on FDI in the context of less advanced transition economies and to analyse whether the tax effect is conditional on the level of economic development. A small number of studies exist analysing the importance of tax policy regime in attracting FDI covering South-East European countries. In this study, we rely on panel gravity econometric framework and examine the impact of tax policy on FDI using bilateral FDI flows between 8 home and 8 South East Europe host countries in the period 2000–2018. We estimate the regression using Prais-Winsten correlated panels corrected standard errors PSCE method to obtain robust estimates of individual effects in the presence of heteroscedasticity and serial correlation. The seven SEE host countries included in the sample are considered of similar economic structures and institutional transformation, which seems important in analysing tax policy effectiveness and minimising biases associated with econometric modelling of FDI determinants. Finally, we study this relationship in an integrated framework considering traditional gravity forces as well as a number of additional FDI determinants, including institutional factors. We show that, although tax policy seems an important determinant of FDI, its effects seem to be conditional on the level of technological development. Given these findings, reducing corporate income tax may be considered an effective tool in promoting FDI, which seems to be of particular importance for less developed transition economies. The results are robust to different model specifications and consideration of endogeneity.Implications for Central European audience: The direct implications of this research for business policymakers in CEE include the need to revise and optimise the levels of corporate income tax and incorporate this specific policy instrument in FDI strategies. In particular, the results of this research indicate that tax cuts have been more effective in attracting FDI in countries that are at a lower level of technological sophistication. The managers could seek to size the investment opportunity related to possible further corporate income tax cuts in the group of least developed CEE amid the economic rationale for tax policy competition among these countries.

Notching R&D Investment with Corporate Income Tax Cuts in China

We study a Chinese policy that awards substantial tax cuts to firms with R&D investment over a threshold or “notch.” Quasi-experimental variation and administrative tax data show a significant increase in reported R&D that is partly driven by firms relabeling expenses as R&D. Structural estimates show relabeling accounts for 24.2 percent of reported R&D and that doubling R&D would increase productivity by 9 percent. Policy simulations show that firm selection and relabeling determine the cost-effectiveness of stimulating R&D, that notch-based policies are more effective than tax credits when relabeling is prevalent, and that modest spillovers justify the program from a welfare perspective. (JEL D22, D24, H25, O14, O32, P31, P35)

Winning the votes for institutional change: how discursive acts of compromise shaped radical income tax reforms in the United States

ABSTRACT Since the 1980s, many governments in the Western world have implemented radical income tax cuts which have become associated with soaring levels of inequality. The literature has focused on institutional accounts to explain these developments. However, institutions alone cannot account for the emergence of societal and political support necessary for radical change of this kind. Therefore, this paper explores the role of communication techniques directed at voters, interest groups and legislators to enable radical reform. Based on a content analysis of Congressional debates for the Reagan and Bush tax cuts, contextualised with archival documents from Presidential Libraries, this study shows the critical relevance of strategic acts of compromise to shore up legislative and voter support for radical tax cuts. It finds (a) that change actors have several different acts of strategic compromise (incorporation, compensation, and reconciliation) at their disposal which they use at different points in the legislative process. That (b) the most successful strategies consistently link the coordinative discourse (bargaining with interest groups behind closed doors) and communicative discourse (directed at the public and the minority congressional party). And that (c) change actors learn how to the use successful combinations of compromise over time and thereby enhance reform stability.

The Macroeconomic Effects of Income and Consumption Tax Changes

This paper estimates the effects of exogenous changes in income and consumption taxes. The tax shocks are proxied with a narrative account of tax liability changes in the United Kingdom. Income tax cuts have large effects on GDP, private consumption, and investment. The effects of consumption tax cuts are modest and not statistically significant on GDP and its components. Shifting the burden of taxation from income to consumption is expansionary. Consistent with conventional public finance theories, these results indicate that it is crucial to distinguish between direct and indirect taxation when studying the transmission mechanism of fiscal policy. (JEL E21, E22, E23, H24, H25)

Output, Employment, and Price Effects of U.S. Narrative Tax Changes: A Factor-Augmented Vector Autoregression Approach

This paper examines the short- and long-run effects of U.S. federal personal income and corporate income tax cuts on a wide array of economic policy variables in a data-rich environment. Using a panel of U.S. macroeconomic data set, made up of 132 quarterly macroeconomic series for 1959-2018, the study estimates factor-augmented vector autoregression (FAVARs) models where an extended narrative tax changes dataset combined with unobserved factors. The narrative approach classifies if tax changes are exogenous or endogenous. This paper identifies narrative tax shocks in the vector autoregression model using the sign restrictions with Uhlig's (2005) penalty function. Empirical findings show a significant expansionary effect of tax cuts on the macroeconomic variables. Cuts in personal and corporate income taxes cause a rise in output, investment, employment, and consumption; however, cuts in personal taxes appear to be a more effective fiscal policy tool than the cut in corporate income taxes. Real GDP, employment, investment, and industrial production increase significantly and reach their maximum response values two years after personal income tax cuts. The effects of corporate tax cuts have relatively smaller effects on output and consumption but show immediate and higher effects on fixed investment and price levels.

Stock Market Reactions to Legislated Tax Changes: Evidence from the United States, Germany, and the United Kingdom

We study the effect of tax policy on stock market returns in the United States, Germany, and the United Kingdom using GARCH models and a unique daily dataset of legislative tax changes during the period 1978 to 2018. We find that days of discretionary tax legislation during all stages of the process often matter for returns, both in terms of statistical significance as well as economic relevance. Further disaggregating the tax shocks shows that news about personal income tax cuts affects stock market returns positively, whereas business tax legislation is rarely influential. We find evidence of stock market spillovers, mainly from US tax changes to European stock markets. In several cases, we measure significant effects of changes in tax legislation on the days the changes are implemented. The US House Committee Report appears to be the most influential legisla-tive stage. During the financial crisis, stock markets were more responsive to tax legislation. Finally, S&P500 returns tend to react at earlier legislative stages than do DAX returns, whereas FT30 returns barely react on days of domestic legislative action.

Spatial impacts of fiscal stimulus policies during the 2009 global financial crisis in Indonesia

In response to the 2008/2009 global financial crisis (GFC), many developing countries, including Indonesia, launched fiscal stimulus packages (FSP). These FSPs typically consist of several sophisticated fiscal policies that may not necessarily complement each other. While the impact of these policies at the aggregate country level in developed countries has been widely discussed, the spatial impact of these policies within developing countries is less understood. Utilizing an inter-regional computable general equilibrium (CGE) model, this paper aims to assess and understand the short- and long-term economic impacts of these stimulus policies using Indonesia as a case study. This paper, hence, provides a quantitative ex-post assessment of FSPs typically implemented during the 2009 GFC by developing economies. Overall, results, indicate that fiscal stimulus had a positive impact on aggregate demand and on poverty prevention, principally via stimulating private consumption. Corporate income tax cuts have the largest economic impact in the long-run, and cash transfers are the most useful policy tool for alleviating poverty. An FSP, however, could have an uneven spatial distributional effect on output across regions, particularly in the short-term.

How COVID-19 shock will drive the economy and climate? A data-driven approach to model and forecast.

The pandemic shock puts the world on quarantine and paused economic operations that affected energy consumption and economic output. This study analyzed the impact of the COVID-19 shock on GDP, energy consumption, and climate change then forecasted the situation until 2032 using the system dynamic modeling approach. The outcomes reveal that the pandemic shock will decrease the growth by 1.3% in 2020 and 1.32% in 2021. The current shortfall, low energy consumption, and delay in completion of energy-related projects can reduce the GDP by 5.2% in 2020. The effect will penetrate the system and will cause further losses in the upcoming years. The energy consumption and quarantine situation will improve the climate situation and drop the average temperature by 0.049 and 0.021 oC in 2020 and 2021. The aggregate demand and supply side measures such as national spending, lowering the lending rate, and cuts in income taxes can help in diffusing the situation. The government should start operations on ongoing energy projects, give relaxation to SME’s with tight SOPs to secure jobs, and prevent possible GDP losses. The decline in oil prices provides an opportunity to cut fossil fuel subsidies and implement a carbon pricing mechanism.

International spillover effects of U.S. tax reforms: evidence from Germany

Abstract This paper explores the international transmission of U.S. tax shocks. Using structural vector autoregressions, we study the impact on the German economy and on German tax legislation. Our results suggest that, after a U.S. tax cut, German GDP increases only moderately. Positive effects via the income channel outweigh negative effects stemming from price developments. Significant changes in the transmission channels arise by distinguishing between the types of the U.S. tax shock. German tax policy either reacts with diametric measures, or remains passive when considering the whole sample period. For a sample starting in 1980, we find that, in particular, after U.S. corporate income tax cuts, tax reductions are also implemented in Germany.

Can Corporate Income Tax Cuts Stimulate Innovation? - ERRATUM

Can Corporate Income Tax Cuts Stimulate Innovation? - ERRATUM

The fiscal state-dependent effects of capital income tax cuts

Using the post-WWII data of U.S. federal corporate income tax changes, within a Smooth Transition VAR, this paper finds that the output effect of capital income tax cuts is government debt-dependent: it is less expansionary when debt is high than when it is low. To explore the mechanisms that can drive this fiscal state-dependent tax effect, the paper uses a DSGE model with regime-switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment. As government debt increases to a sufficiently high level, the probability of future fiscal adjustments starts rising, and the expansionary effects of a capital income tax cut can diminish substantially, whether the expected adjustments are through a policy reversal or a consumption tax increase. Also, a capital income tax cut need not always have large revenue feedback effects as suggested in the literature.

Political ChroniclesCommonwealth of Australia July to December 2019

After the successful election result of 18 May 2019, the Morrison government acted swiftly to give effect to its priority legislative agendas. The parliament was recalled expeditiously on 2 July, primarily to pass the Coalition’s Budget‐announced tax package with effect from 30 June. The government claimed it had the mandate to introduce the entire $158 billion package and insisted on passing it in its entirety. A series of sequential income tax cuts was intended to provide immediate relief to households with a tax offset, then flattening the tax structure for middle income earners, and then a much larger cut with one flat rate of 30 per cent applying to incomes between $45,000 and $200,000 effective from 2024‐25 (down from 37 per cent and covering 94 per cent of all taxpayers). Still in shell‐shock at their defeat, Labor initially raised issues with the flatter third phase costing $95 billion over five years, but then flailed about claiming the tax cuts were too generous and unaffordable, then suddenly insufficient, and then too delayed. Nevertheless, not wanting to be seen as opposing tax cuts, Labor agreed to back the government over the legislation in the lower house and much of it in the Senate by choosing not to oppose the measures, but planned to amend the third stage in the Senate (and refused to rule out repealing the third stage if it won government). In the Senate, crossbench senators Stirling Griff and Rex Patrick from Centre Alliance, as well as Cory Bernardi and Jacqui Lambie, were induced to support the full package, in part swayed by some sweetener concessions to their states (such as forgiving Tasmania’s $157 million debt for social housing, the deal guaranteeing reliability and lower prices for gas and electricity). Only the Greens consistently opposed the tax changes, while the two One Nation senators abstained.

The Fiscal State-Dependent Effects of Capital Income Tax Cuts

Using the post-WWII data of U.S. federal corporate income tax changes, within a Smooth Transition VAR, this paper finds that the output effect of capital income tax cuts is government debt-dependent: it is less expansionary when debt is high than when it is low. To explore the mechanisms that can drive this fiscal state-dependent tax effect, the paper uses a DSGE model with regime-switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment. As government debt increases to a sufficiently high level, the probability of future fiscal adjustments starts rising, and the expansionary effects of a capital income tax cut can diminish substantially, whether the expected adjustments are through a policy reversal or a consumption tax increase. Also, a capital income tax cut need not always have large revenue feedback effects as suggested in the literature.