Interest Income Tax Research Articles

Recent Developments in Federal Income Taxation: The Year 2001

This current developments outline discusses, and provides context to understand the significance of, the most important judicial decisions and administrative rulings and regulations promulgated by the Internal Revenue Service and Treasury Department during the year 2001. Most Treasury Regulations, however, are so complex that they cannot be discussed in detail; only the basic topic and fundamental principles are highlighted. Amendments to the Internal Revenue Code generally are not discussed except to the extent that they have either led to administrative rulings and regulations or have affected previously issued rulings and regulations otherwise covered by the outline. The outline focuses primarily on topics of broad general interest — income tax accounting rules, determination of gross income, allowable deductions, treatment of capital gains and losses, corporate and partnership taxation, exempt organizations, and procedure and penalties. It deals summarily with qualified pension and profit sharing plans, but generally does not deal with international taxation or specialized industries, such as banking, insurance, and financial services.

СУЧАСНА ДЕПОЗИТНА ПОЛІТИКА БАНКІВ УКРАЇНИ ЯК СКЛАДОВА СИСТЕМИ УПРАВЛІННЯ ПАСИВАМИ

The resilience of the banking system during the war is largely determined by the availability of sufficient sources of funding – own, attracted and borrowed. One such source is bank deposits. The deposit policy of commercial banks in Ukraine has changed significantly in recent years, and banks today have ceased to depend on deposit sources, due to sufficient liquidity of banks due to cheap funds raised from the NBU as refinancing. The main differences in the deposit policy of banks in 2014–2019 and in 2020–2022 are summarized. There is a steady increase in deposits even in times of war, and demand deposits significantly outweigh time deposits, which is due to the desire of customers to have free access to their funds in conditions of uncertainty in the future. The general tendency to increase the deposit portfolio of banks is due to the restoration of confidence in the banking system, as well as the existence of the Deposit Guarantee Fund, which during martial law and three months after its termination will provide full compensation to depositors. Since 2020, we have seen a significant reduction in the level of deposit rates, which today don’t cover inflation. In addition, banks today have no economic reason to raise deposit rates, as the real economy has not had enough facilities to increase lending due to the crisis, the COVID-19 pandemic and especially the war. As an object for investment, deposits today compete with IGLBs, which have higher yields and are not taxed. Today, the main problems associated with attracting deposits in Ukraine are: uncertainty about the future, falling incomes, reduction of interest rates on bank deposits, high level of interest income taxation, significant amounts of cash in circulation, etc. Modernization of banks’ deposit policy should be based on constant analysis of the deposit market, adaptation to the conditions of its operation and the formation of adequate interest rates by banks in order to further invest in the real economy.

On the taxation of deposits and bonds and the need to qualify passive income

Subject. The article discusses the taxation of interest income from deposits and bonds in the Russian Federation from perspectives of individual investors and the State, classification of people’s income into active and passive. Objectives. We outline actions to adjust the fiscal policy on personal income tax to unify the taxation and stimulate the innovating activity of individuals. Methods. The study is based on methods of logic and comparative analysis. Results. Tactically, payers of interest income are now bound to inform taxpayers on accrued interest income, and the need to qualify coupons of government, municipal and corporate bonds for relief. The strategic result is determined as the need to qualify active and passive income. Conclusions and Relevance. The findings can be an agenda of the State Duma of the Russian Federation and promulgated in the Tax Code of the Russian Federation.

HOUSING FINANCE: IMPACT OF HEAVY INTEREST INCOME TAX

Heavy taxation of interest income becomes a structural driver of property prices in a low-interest-rate environment. Inflation-adjusted price appreciation in 1996-2017 is approximately 200 basis points higher in 14 countries allowing no exemptions on interest income than in 37 countries that tax interest income at favorable rates or provide exemptions. Results for average returns over long-term periods are confirmed in models with annual frequencies, city-level data, and in a sample of 39 OECD countries for which price/rent ratios are available. It appears that investors view direct real estate, a heavily tax-favored asset, as an inflation hedge and/or alternative to fixed income asset. Higher interest income taxation may be fueling demand for direct real estate investments by retail investors. Separately, my empirical findings suggest that easy monetary policy effects can be magnified through the housing channel in countries that do not allow exemptions on interest income. Consequently, we should expect larger investment misallocations due to asset prices departure from fundamentals in some geographies. 
 JEL Classification Codes: E3, E4, F3, G1, G5, H2.

The welfare effects of infrastructure investment in a heterogeneous agents economy

Abstract Public infrastructure is one of the foundations for the economic growth of a country. While there is a strong consensus regarding infrastructure’s effect on growth, less is known about the effect of infrastructure on welfare and the distribution of wealth. In this paper, we examine the quantitative effect of infrastructure investment on welfare and the degree of inequality present within a developing country. In so doing, we characterize the effects resulting from increased infrastructure investment by tracing out the entire transition path between steady states. Three results standout: (i) both average and individual welfare effects are sizable, regardless of how the additional investment is financed, (ii) when distortionary taxes are adjusted to finance additional investment, poorer agents benefit more when the interest income tax is used, while richer agents benefit more when either the consumption or labor income taxes are used, (iii) inequality, as measured by the wealth Gini, rises in the short-run, but the long-run effect depends on which financing method is chosen.

‘아시아-태평양전쟁기’(1941∼1945) 조선총독부의 이자소득세 정책과 고소득층의 대응

‘아시아-태평양전쟁기’(1941∼1945) 조선총독부의 이자소득세 정책과 고소득층의 대응

Inflation, indexation and interest income taxation

The work looks at the various efforts being made to make tax systems inflation-proof, from both a theoretical and practical standpoint. As to the latter, the author examines the taxation of interest income in an inflationary situation and makes some recommendations aimed at reducing, if not eliminating, inequities that arise. As to the former, the author generalises the theoretical conclusions of Fisher’s theory by explicitly introducing income taxation among the variables that affect the Fisherian conclusion. The basic policy issue raised is that the Canadian solution does very little to solve the problems related to the taxation of capital gains and interest incomes in an inflationary situation.

Inflation, indexation and interest income taxation. A comment

The article comments on V. Tanzi’s “Inflation, Indexation and interest income taxation”. The author agrees with the proposition that, for equity reasons, it would be desirable to find some offset to the transfer of wealth which takes place under inflation between borrowers and lenders. However, he seeks to show that the income tax system may not be the most appropriate practical mechanism to obtain the desired offset. In addition, certain conceptual issues are raised. A qualified alternative suggestion is then made.

Should the Tax Law Require Current Accrual of Interest on Derivative Financial Instruments?

This paper considers whether the original issue discount rules, which require current taxation of interest income regardless of whether it is paid, should be expanded to cover derivative financial instruments. The original issue discount rules were recently expanded to debt instruments with contingent payments (so-called structured notes), and commentators have advocated using similar principles to expand the rules to other derivatives. The paper argues that the original issue discount rules should not be expanded beyond their current scope. The current accrual requirement is inconsistent with the realization requirement, and expansion of the current accrual requirement merely moves the place where the rules are inconsistent. Expansion of the original issue discount rules cannot eliminate or even reduce the inconsistency in the law. Using a theory of the most efficient place to draw lines between inconsistent tax rules, the paper argues that current law is superior to an expansion of the original issue discount rules.

A Homeowner-Based Methodology for Economic Analysis of Energy-Efficiency Measures in Residences

Residential energy-efficiency measures, besides energy savings, provide opportunities for improvement of thermal comfort, air quality, lighting quality, and operation. However, all these benefits sometimes are not enough to convince a homeowner to pay the incremental cost associated with the energy-efficiency measure. The objective of this work is to develop a methodology for the economic evaluation of residential energy-efficiency measures that can simplify the economic analysis for the homeowner while taking into consideration all factors associated with the purchase, ownership, and selling of the house with the energy-efficiency measure. The methodology accounts for direct and indirect economic parameters associated to an energy-efficiency measure; direct parameters such as the mortgage interest and fuel price escalation rate, and indirect parameters such as savings account interest and marginal income tax rate. The methodology also considers different cases based on the service life of the energy-efficiency measure and loss of efficiency through a derating factor. To estimate the market value, the methodology uses the future energy cost savings instead of the cost of the EEM. Results from the methodology offer to homeowner annual net savings and net assets. The annual net savings gives the homeowner a measure of the annual positive cash flow that can be obtained from an energy-efficiency project; but more important, the net assets offer a measure of the added net wealth. To simplify and increase the use of the methodology by homeowners, the methodology has been implemented in an Excel tool that can be downloaded from the TxAIRE’s website.

Interest income taxation, optimal monetary policy, and macroeconomic volatility

This paper studies optimal discretionary monetary policy in an extension of the basic new Keynesian model that incorporates interest income taxation, focusing on the effect of changes in the interest income tax rate on macroeconomic volatility. Simulations show that high levels of taxation increase inflation volatility, the output gap volatility, and the unconditional expectation of the central bank's loss function.

The Income Tax Paradox

In non-neutral tax systems, levying taxes may have a paradoxical effect on investments: An investment’s value increases due to taxation. The so-called income tax paradox occurs when an investment’s after-tax net present value exceeds the net present value before taxes. In this article, we explain reasons for this paradoxal effect and demonstrate the income tax paradox using numerical examples. We show that occurrence of the tax paradox depends on taxation of interest income in the country where the investment project is carried out. Depending on the tax system, investments that are profitable (unprofitable) on a pre-tax basis can be unprofitable (profitable) due to taxes. Thus, an optimal investment decision can only be made by taking taxes into account.

Interest Income Tax Evasion, the EU Savings Directive and Capital Market Effects*

AbstractThe EU Savings Directive has been celebrated as a major political breakthrough in coordinating taxation in Europe. Against this background, the present paper evaluates the real‐world effects of this directive. The directive has left a loophole by providing grandfathering (exemption from withholding tax) for some securities. In this paper, we compare the pre‐tax returns of exempt bonds and comparable taxable bonds. If working around the Savings Directive is difficult for income tax evaders in Europe, then investors should be willing to pay a premium for bonds that are exempt from the withholding rate. Conversely, if such a premium is absent, then this suggests that the supply of existing loopholes (exempt bonds included) is large enough to allow tax evaders to continue evasion at no additional cost. The findings of our study are in line with this latter interpretation.

The Corporate Propensity to Save

ABSTRACTWhy do corporations accumulate liquid assets? We show theoretically that intertemporal trade‐offs between interest income taxation and the cost of external finance determine optimal savings. Intriguingly, we find that, controlling for Tobin's q, saving and cash flow are negatively related because firms lower cash reserves to invest after receiving positive cash‐flow shocks, and vice versa. Consistent with theory, we estimate negative propensities to save out of cash flow. We also find that income uncertainty affects saving more than do external finance constraints. Therefore, contrary to previous evidence, saving propensities reflect too many forces to be used to measure external finance constraints.

THE INFLUENCE OF THE INTEGRATION IN THE EUROPEAN UNION ON THE ROMANIAN FISCAL LEGISLATION

Fiscal policy constitutes – within the state's economic policy – a system by means of which the taxes and duties owed to the country's consolidated budget are established and collected. Taking into account the role fiscal policy has been playing since Romania's admission in the European Union, one of the goals ceaselessly looked for is its adapting to the international community's acquis through the implementation of the European directives in our context. The EU directives make reference to direct taxes: dividend tax, interest income tax, assets transfer, shares exchange, income taxation for the non-residents, and so on, along with the indirect taxes: value-added tax, excise duties, etc. The paper approaches the main provisions within the contents of the European directives as well as the means of their implementation in the Romanian fiscal legislation regarding various types of taxes. The implementation of the European directives has been simultaneous with the establishing of measures concerning fiscal fraud prevention, frauds liable to have a negative impact on the state's consolidated budget.

Taxation of outbound direct investment: economic principles and tax policy considerations

This paper reviews economic principles for optimality of the taxation of international profit, from both a global and national perspective. It argues that for traditional systems based on the residence of the investor or the source of the income, nothing less than full harmonization across countries can achieve global optimality. The conditions for national optimality are more difficult to identify, but are most likely to imply source-based taxation. However, source-based taxation requires an allocation of the profits of multinational companies to individual jurisdictions; this is not only very difficult in practice, but in some cases is without any conceptual foundation. The taxation of interest income on a residence basis is also hard to justify if the aim of the tax system is to tax only the income arising from economic activity in a given country.

Die EU-Zinsenrichtlinie: Ein Schuss in den Ofen?

Abstract: The ultimate aim of the EU Savings Tax Directive is the effective taxation of interest income. The EU has switched with the Directive from a policy which was based on trust in the citizens and on a certain degree of self-determination, to a procedure which is characterized by distrust and monitoring. On the other hand the Directive's regulations which focus on the classical behavioural determinants of tax evasion seem to be insufficient. In sum, it is possible that the Directive has failed to achieve its goal. The integral mechanism of the Directive is tax-related information exchange. Since tax-related information exchange is a strategic variable for the member states to adjust the attractiveness of their financial markets, it is debatable whether existing loopholes in the national implementations are the result of hidden non-cooperative behaviour of the member states.

Interest Income Tax Evasion, the EU Savings Directive, and Capital Market Effects

Interest Income Tax Evasion, the EU Savings Directive, and Capital Market Effects

Optimal Nonlinear Taxation in an Overlapping-Generations Setting with Money as an Asset

We investigate the optimal nonlinear wage and interest-income taxes with money as an asset, assuming that there are two types of labor, which are not perfect substitutes in production, and that each type is difficult for the policymaker to observe. It is shown that the optimal interest-income taxation differentiates asset prices facing two types of individuals, and hence that the zero-nominal-interest-rate rule holds for the high-ability type, although not for the low-ability type unless the mimickers' valuation of future consumption is the same as that of the true low-ability individual without separability of the utility function.

The Corporate Propensity to Save

Why and how do corporations accumulate liquid assets? We show theoretically that intertemporal trade-offs between interest income taxation and the cost of external finance determine optimal savings. We find the striking result that, controlling for Tobin's q, saving and cash flow are negatively related because firms lower cash reserves to invest after receiving positive cash-flow shocks, and vice versa. Consistent with theory, we estimate negative propensities to save out of cash flow. We also find that income uncertainty affects saving more than do external finance constraints. Therefore, contrary to previous evidence, saving propensities reflect too many individual forces to be used to measure external finance constraints.