Increase In Tax Rate Research Articles

Higher Taxes at the Top: The Role of Entrepreneurs

This paper computes optimal top marginal tax rates in Bewley-Huggett-Aiyagari–type economies that include entrepreneurs. Consistent with the data, entrepreneurs are overrepresented at the top of the income distribution and are thus disproportionately affected by an increase in the top marginal income tax rate. The top marginal tax rate that maximizes welfare is 60 percent. While average welfare gains are positive and similar across occupations along the transition, they are larger for entrepreneurs than for workers in the long run, and this occupational gap in welfare gains after the tax increase widens with increasing income. (JEL D11, D21, D31, H21, H24, L26)

The Role the Informal Economy Plays on Entrepreneurship with an Emphasis on Institutional Quality Index

The informal economy is one of the most important influencing factors on the type of entrepreneurial activity. In this study, the role of the informal economy on the formation of entrepreneurial activities (opportunity and necessity-based entrepreneurship) with an emphasis on the institutional quality index in selected oil producing countries during the period 2018–2008 has been investigated. This was done by using the three stage least squares model. In addition, the MIMIC model was used to extract the hidden variable of the informal economy volume and the principal components. Furthermore, the analysis model was used to extract the institutional quality index.The results show that increasing unemployment, increasing tax rates and increasing natural resource rent lead to an increase in the informal economy in these countries, whereas an increase in the informal economy leads to a decrease in opportunity-based entrepreneurship and increases necessity-based entrepreneurship. These results suggest that if the goal is to improve opportunity-based entrepreneurship, macroeconomic policies should be designed to reduce unemployment and lower tax rates and natural resources rent, thereby reducing the size of the informal economy in these countries. In such circumstances, an increase in opportunistic entrepreneurship is possible and an improvement in the economic growth of this field can be expected.

Напрями удосконалення акцизної політики у сфері тютюнових виробів в Україні

The article analyses the ways to improve tobacco excise taxation in Ukraine considering a respective EU Member States experience, consequences of national reforms held in previous years, as well as challenges and potential threats caused by the pandemic. A worsening economic situation and the recent decline in income compounded the existing problems related to tobacco taxation in Ukraine. The increase of excise tax rate on cigarettes by 20% annually till 2025 and an inconsistent decision on more than four times increase of excise tax rates on electronically heated tobacco products (EHTP) pose a risk of boosting illicit trade. The advance payment of excise tax on imported tobacco products, in turn, negatively affects finances of importers due to the working capital diversion. Following that, the priority steps with regard to the excise policy of Ukraine should be aimed at: 1) revision of the existing plan of increasing tax rates on cigarettes by slowing down the growth of tax burden and simultaneous expansion of the plan till 2028; 2) correcting the burdensome reform on excise taxation of EHTP to establish more liberalized tax regime 3) switching to payment of excise tax on imported tobacco products during customs clearance. The mentioned initiatives taking into account a strong need to improve a fiscal situation in Ukraine due to the spread of COVID-19 will reduce a negative impact of increasing excise tax rates and administration procedures on tobacco industry. They will also prevent the growth of illicit trade in tobacco products and thus will contribute to improving the efficiency of tax system and strengthening the confidence of business entities.

A study on the incentive compensation structure with payroll tax: A continuous-time principal-agent model

This paper studies a case when the government levies a payroll tax on the employee (agent) of an enterprise. We use a continuous-time principal-agent framework to analyze the impact of the tax on the employee’s working strategy and derive an incentive compensation scheme. The agent is supposed to be aware of his pre-tax and after-tax salary. Under the theory of behavioral economics, loss caused by taxation is taken into consideration. The Hamilton-Jacobi-Bellman (HJB) equation of principal’s profits is derived. By exploiting the HJB equation, we get several properties of the optimal contract. We also perform comparative statics to show our results. The model suggests that the agent’s utility loss enlarges as the tax rate increases. However, an increase in the tax rate does not always decrease principal’s profits.

Fiscal reform: a computable general equilibrium (CGE) analysis for the Kingdom of Saudi Arabia

PurposeThis paper aims to provide a quantitative assessment of the broad economic effects of tax policy reform in the Kingdom of Saudi Arabia (KSA).Design/methodology/approachUsing a dynamic computable general equilibrium (CGE) model of the KSA, three simulations are run. The first simulation is the baseline simulation, which generates growth paths of the Saudi economy in the absence of tax reform. In developing the baseline simulation, this study incorporates forecasts from the International Monetary Fund. The remaining simulations are policy simulations. A policy simulation deviates from the baseline simulation in response to a policy change. In the first policy simulation, this study introduces a value-added tax (VAT) that generates SAR 35bn. This study assumes budget neutrality with the additional tax revenue transferred to households via a lump sum payment. In the second policy simulation, this study introduces a corporate income tax that generates SAR 35bn. This study then calculates and compares the distortion these taxes introduce into the economy.FindingsThis study finds that although the introduction of new taxes increases government tax revenue, markets are distorted lowering efficiency and production. An introduction of VAT increases the cost of consumption relative to the cost of production. As a consequence, the real cost of labour increases lowering employment in the short run. Employment moves to the baseline, as wages adjust capital and real gross domestic product (GDP) is below base throughout the simulation period. The second simulation is an increase in the corporate tax rate with lowers the post-tax rates of return investors receive. This simulation shows that the negative impact on investment, capital and GDP is larger with the introduction of a corporate tax than with the VAT.Research limitations/implicationsLiterature focusing on tax policy reform in the Gulf Cooperation Council and, specifically, Saudi Arabia is limited. This paper contributes to the literature by focusing on the following: understanding the impact and mechanisms through which changes in taxation impact the economy more generally; understanding the potential harm caused to allocative efficiency and production due to taxes; and ways in which fiscal reform might complement other reforms such as efforts to diversify the economy, labour market and energy price reforms. This improves the information base available to policymakers charged with designing an optimal tax system that meets all future requirements of a country such as the KSA.Originality/valueThe authors developed and applied a CGE model for the KSA to analyse the impact of VAT and corporate tax on the Saudi economy. To the best of the authors’ knowledge, there are no recent CGE models for Saudi Arabia that have been used for tax policy or quantifying the potential harm to the economy when new taxes are introduced.

Genesee County voters give OK to tax hike for mental health

With a majority totaling just under 55% of those who cast ballots, Genesee County, Michigan voters on May 4 approved a 10‐year increase in the county's property tax rate to finance improvements to the mental health system. The revenue generated from the approved increase will pay for initiatives in seven focus areas, with projects ranging from a new crisis center to stepped‐up police training in mental health crisis response to programs for youth (see MHW, May 3). According to a news release from Genesee Health System, the countywide public mental health agency that will manage the mental health infrastructure improvements, Genesee County becomes the sixth county in Michigan to provide property millage support for mental health services. “We will be organizing community‐based teams around the seven focus areas seeking input … on the needs and following best practices by those in the field,” said Genesee Health System CEO Dan Russell. Just over 43,000 of the county's 343,000 registered voters cast ballots in this month's special election, which county commissioners authorized after having hesitated to bring the proposal to voters in 2020.

Michigan county voters considering tax levy for mental health projects

Voters in Genesee County, Michigan, this week will decide whether the need for more effective mental health crisis response in the community warrants a 10‐year increase in the county's property tax rate.

Putting grocery food taxes on the table: Evidence for food security policy-makers

In the United States, grocery tax policy varies at both state and county levels, with 16 states having grocery taxes in 2020. Several states are engaged in active debates about whether to remove or impose such taxes. Although the extant literature evaluates multiple factors that may contribute to food insecurity, little is known about the relationship between grocery food sales taxes and food insecurity. We present county-level panel data on grocery taxes from 2006 through 2017 and find that jurisdictions with grocery taxes are among the most food insecure in the country. The regressiveness of grocery taxes exacerbates food insecurity, at least in theory. We link our tax data with county-level food insecurity measures and other data from the Current Population Survey. Treating grocery taxes as exogenous, we estimate that a one percentage point increase in grocery tax rates is associated with a 0.84% increase in the probability of being food insecure for low-income households. Using these estimates, we conduct policy simulations of grocery taxes that have been recently considered in six states and assess the potential impacts on food insecurity. One caveat is that our estimator may be biased towards or away from zero depending on whether increases in grocery taxes within counties over time are positively or negatively correlated with unobservables affecting food security. However, assuming the onset and removal of grocery taxes within a county are exogenous, our results show that proposed grocery taxes may exacerbate food insecurity by one to five percentage points.

Taxes and the growth in mutual funds: Evidence from OBRA 93

In recent years, individuals have steadily moved from direct ownership of equities to holding securities through mutual funds. Prior research has attributed this phenomenon to tax incentives to hold mutual funds in tax-preferred retirement accounts. In contrast, employing household-level microdata and using OBRA 93 as a quasi-natural experimental setting, we find that on average, investors reduced their mutual fund holdings within tax-preferred accounts following a tax rate increase. However, we also observe that this effect is primarily driven by investors with relatively high trading activity within their tax-preferred accounts; investors exhibiting relatively low trading activity generally increased their mutual fund investments in these accounts after OBRA 93. Investors who increased their mutual fund holdings did not do so by rebalancing away from other asset classes. Collectively, our results suggest that taxes are not driving the growth in mutual funds. This finding has important public policy implications because of the growing popularity of using mutual funds as a retirement savings vehicle, the dwindling number of individuals covered by defined benefit plans, the dramatic increase in the importance of mutual funds as a financial intermediary, and the continued state of flux in U.S. tax policy.

Non-linear effects of tax changes on output: The role of the initial level of taxation

We estimate the effect of worldwide tax changes on output following the narrative approach developed for the United States by Romer and Romer (2010). We use a novel dataset on value-added taxes for 51 countries (21 industrial and 30 developing) for the period 1970–2014 to identify 96 tax changes. We then use contemporaneous economic records to classify such changes as endogenous or exogenous to current (or prospective) economic conditions. In line with theoretical distortionary and disincentive-based arguments – and using exogenous tax changes – we find that the effect of tax changes on output is highly non-linear. The tax multiplier is essentially zero under relatively low initial tax rate levels and more negative as the initial tax rate increases. Based on a global sample, these novel non-linear findings suggest that the recent consensus pointing to large negative tax multipliers in industrial countries, particularly in industrial Europe (e.g., Alesina, Favero, and Giavazzi, 2015) may represent a special case driven by high initial tax rates in these countries.

Australia’s Tax Law Policy of the Past and that of the Post Digital Revolution

Tax policy advocates have long suggested an optimal tax system would be the most efficient tax regime but until recently it has been unobtainable. Technological developments increase the feasibility of this tax. The first half of this article explains how Australian tax policy has developed to date by looking at government commissioned and sanctioned reviews of the tax system. What becomes apparent is that reform measures aimed at achieving the tax policy goals of efficiency, equity and simplicity often involve a lowering of tax rates and a comprehensive tax base system. The second half then explores the changes that have made the prospects of an optimal tax system more feasible and explores how evolving policy advice has moved in the direction of optimal tax theory. It is argued that this may involve proposals for reform centered on a less comprehensive tax base, increased tax rates as well as other departures from the traditional tax reform discussion

The Influence of Corporate Income Taxes on Investment Location: Evidence from Corporate Headquarters Relocations

This study examines the effects of jurisdictions’ corporate taxes and other policies on firms’ headquarters (HQ) location decisions. Using changes in state corporate income tax rates across time and states as the setting, we find that a one-percentage-point increase in the HQ state corporate income tax rate increases the likelihood of firms relocating their HQ out of the state by 16.8%, and an equivalent decrease in the HQ state rate decreases the likelihood of HQ relocations by 9.1%. Exploiting the unique tax policy features within the state apportionment system lends strong support to the interpretation that taxation drives this effect. Our analyses also demonstrate that state income tax features affect the destination of the HQ move. We contribute to the literature on corporate decision making by showing how state income taxation affects a real corporate decision that has significant economic consequences for the company and the state.This paper was accepted by Brian Bushee, accounting.

Summaries of Articles

Summaries of Articles

Stimulating Domestic Demand as a Key Factor of Economic Growth

World economy shows a high level of uncertainty. There are considerable risks of economic slowdown and stock market collapse. For many years, the Russian economy has been dependent on external factors. Recently, when anti-Russian sanctions are imposed, it is particularly important to find internal sources of growth, including domestic demand as the most significant factor. However, environment for the development of the Russian economy remains unfavourable due to high interest rates, volatile exchange rate, increasing tax rates, and ambiguous economic policy. Based on the analysis of regional statistics (including some regions of the Central Federal District), we confirmed the weak relationship between investments and gross regional product (GRP) revealed by other scientists. This may be the result of poor investment efficiency and its low multiplier effect. In this situation, the right choice of sectors with high multipliers and investment efficiency creates the potential for increasing domestic demand. Simultaneously, mechanisms for the expansion of resources ensuring regional economic growth play an important role. In this regard, we developed approaches aimed at the creation of conditions for the expansion of regional financial resources to support economic activity, domestic demand and economy in general, considering a social aspect of these processes. Some of the proposed mechanisms stimulate the participation of banks in financing economic processes, federal or regional bond issuance (the Bank of Russia would be the main buyer), etc. These proposals consider the experience of other countries in stimulating economic growth, including at the regional level. Financial regulators and relevant regional agencies can use the research results for developing economic policies.

Does South Africa’s tax effort fall short of its tax capacity?

ABSTRACT The main objective of this study is to assess South Africa’s tax revenue performance. This is achieved by estimating tax capacity and tax effort for the period 1960–2017 through econometric methods. The 2Stage-Least Square results indicate that GDP per capita and inflation have a strong positive and statistically significant impact on revenue mobilisation while population growth, trade openness and agriculture share in GDP have a strong negative and statistically significant impact on revenue mobilisation. Furthermore, we find that South Africa’s tax effort index varies between 0.92 which is below capacity and 1.10 which is above capacity. On average, the tax effort index is 1.00, implying that South Africa performs well above its potential tax capacity. This study therefore cautiously advice against increases in tax rates in the near term as they will discourage economic activity in the form of labour, output and investment. Experiences elsewhere attest that higher tax rates often induce tax avoidance and evasion, creating about their own problems than solutions.

Is There Money on the Table? Evidence on the Magnitude of Profit Shifting in the Extractive Industries

Profit shifting remains a key concern in international tax system debate, but discussions are largely based on aggregate estimates, with less attention paid to individual sectors. Drawing on a novel dataset, we quantify tax avoidance risks in the extractive industries, a sector which is revenue critical for many developing economies. We find that a one percentage point increase in the domestic corporate tax rate has historically reduced sectoral profits by slightly over 3 percent; and the response tends to be more pronounced among mining than among hydrocarbon firms. There is only weak evidence transfer pricing rules contain tax minimization efforts of MNEs in our sample, but interest limitation rules (e.g., thin capitalization or earnings based rules) do reduce the observable extent of profit shifting. Our findings highlight the challenge of taxing income in the natural resource sector and suggest how fiscal regime design might be strengthened.

Is There Money on the Table? Evidence on the Magnitude of Profit Shifting in the Extractive Industries

Profit shifting remains a key concern in international tax system debate, but discussions are largely based on aggregate estimates, with less attention paid to individual sectors. Drawing on a novel dataset, we quantify tax avoidance risks in the extractive industries, a sector which is revenue critical for many developing economies. We find that a one percentage point increase in the domestic corporate tax rate has historically reduced sectoral profits by slightly over 3 percent; and the response tends to be more pronounced among mining than among hydrocarbon firms. There is only weak evidence transfer pricing rules contain tax minimization efforts of MNEs in our sample, but interest limitation rules (e.g., thin capitalization or earnings based rules) do reduce the observable extent of profit shifting. Our findings highlight the challenge of taxing income in the natural resource sector and suggest how fiscal regime design might be strengthened.

Prospect theory in an evolutionary game: Construction of watershed ecological compensation system in Taihu Lake Basin

As an important system to solve cross regional water pollution, watershed ecological compensation has been widely used in the world. However, the existing studies mainly focus on the governments, while ignoring the important role of polluting enterprises in watershed ecological compensation. Thus, the established watershed ecological compensation mechanism is difficult to implement sustainably. Therefore, taking the local governments and polluting enterprises in the watershed as the research object, and studying the change process and influencing factors of their decision-making behavior is of great significance to attract polluting enterprises to join the watershed ecological compensation, and to formulate a sustainable watershed ecological compensation mechanism to solve the cross regional water pollution. Therefore, based on prospect theory and evolutionary game theory, this paper firstly establishes an evolutionary game model between local governments and polluting enterprises in Taihu Lake Basin; secondly, combined with simulation technology, their decision-making behaviors and influencing factors of watershed ecological compensation are studied. The results show that: (1) The initial probabilities will affect their decision-making behaviors; (2) The ecological compensation fee has little influence on the decision-making behaviors of polluting enterprises; (3) The increase of environmental tax rate has significant influence on the local governments’ decision-making behaviors with low initial probabilities; (4) The improvement of supervision ability can promote local governments and polluting enterprises to reach a stable state faster; (5) The marginal decreasing degree of value function has a stronger influence on local governments than on polluting enterprises. This paper can provide suggestions for local governments to build a sustainable watershed ecological compensation mechanism including polluting enterprises, and provide the scientific basis for decision-makers of polluting enterprises whether to join watershed ecological compensation. • The players will follow the prospect theory to make decisions in the short term, but the expectation theory in the long term. • Initial probabilities will affect decision-making behaviors of players. • Ecological compensation fee has little influence on polluting enterprises. • In the low probabilities, environmental tax rate has significant influence on the local government. • Marginal decreasing degree of value function has a stronger influence on local governments than on polluting enterprises.

Environmental Taxation and Subsidization in an Oligopolistic Wholesale Market of Electricity with Intermittent Renewable Energy Sources

I investigate how environmental taxation and subsidization impact investment in non-polluting, intermittent renewable power plants such as wind power and photovoltaics in a wholesale electricity market where oligopolistic firms produce electricity from both polluting fossil fuel inputs and non-polluting renewable energy (RE), and a competitive fringe produces electricity only from non-polluting RE. An emission tax imposed on fossil fuel use such as carbon pricing (CP) is expected to discourage firms from operating the fossil fuel power plants, thereby promoting the substitution of RE for fossil fuel inputs. A subsidy provided to firms building and operating renewable power plants such as feed-in tariffs (FIT) and feed-in premiums (FIP) is expected to reduce setup costs, thereby promoting RE use. This study’s findings indicate that, among FIT, FIP, and CP, a unit increase in subsidy rate under FIT has the greatest impact on RE investment, while a unit increase in tax rate under CP has the smallest impact. Furthermore, if no correlation exists between available renewable power plants at different locations, the wholesale electricity price in an oligopolistic market with FIP or CP is less volatile than that with FIT. This result occurs because the market power of oligopolists facing FIP or CP mitigates the merit order effect, which indicates how much RE lowers the electricity price. The key insight from the model application to a wholesale electricity market in Japan is that the market demand function for wholesale electricity and RE investment costs are among the crucial factors in the achievement of welfare-optimal allocation through environmental taxation and subsidization.

Does Household Tax Burden Have an Impact on Individuals’ Savings in Banks? The Case of Ukraine

Abstract This paper aims to assess the impact of the effective and nominal household tax burden on household deposits in Ukrainian banks. We used the effective tax burden, which includes personal income taxes and value-added tax (VAT) paid. We considered changes in Ukrainian tax law from 2003 to 2016, which included a change from progressive income taxation to proportional income taxation, a decrease in tax rates in 2003, and an increase in tax rates in 2014–2016. The data sample consists of publicly available data on Ukrainian households’ income, savings, and taxes paid in 1996–2019. The analysis was performed using panel regression and the difference-in-difference (DID) method. The tax burden impact on bank deposits is significant and is caused partly by the shadow economy. The results of the study are relevant for Ukraine and countries with similar economies. The methodological approaches developed in the paper can be used for similar studies in other developing countries.