Lower Tax Rates Research Articles

Economic and environmental effects of financing subsidies for non-conventional renewable energies with a carbon tax – A comparison of intersectoral models

Non-conventional renewable energy (NCRE) subsidies have been introduced in various countries to help reduce greenhouse gas (GHG) emissions. However, other social priorities limit the allocation of fiscal resources to this climate policy in Chile. This study analyzes the option of financing NCRE subsidies through carbon taxes in the thermoelectric sector. Specifically, two intersectoral models (the Leontief price model and the SAM price model) are used to simulate the impact of this mix of climate policies on prices, production, employment, and emissions of global and local air pollutants. The results of both models show that CO2 emissions would be reduced slightly in the short term, which is explained by the low current tax rate, the inelasticity of energy demand, and the indirect stimulus of subsidies on production in other sectors of the economy. In addition, it is concluded that the Leontief price model overestimates the impacts since it omits the falls in labor income and household consumption that the SAM price model captures. So, it is recommended to use models based on a social accounting matrix to evaluate energy policies when more sophisticated intersectoral models with endogenous prices and quantities (computable general equilibrium models) are unavailable.

How much tax do the rich really pay? Evidence from the UK

AbstractUsing anonymized administrative data on the population of UK taxpayers, we show that—in line with high-profile anecdotes about the tax affairs of the rich—effective average tax rates (EATRs) decline at the top of the distribution of income and capital gains. We also document substantial variation in EATRs within remuneration level: a quarter of those in the top 1 per cent pay headline rates, while another quarter pay at least 9pp less than the headline rate. Most of this effect is driven by the composition of remuneration, with investment income having lower tax rates and capital gains having lower rates still. If all individuals with income above £100,000 paid the headline rates, this would raise tax revenue on income and gains by £23 billion on a static basis, an increase of 27 per cent in the tax paid by this group.

Tax progressivity and taxing the rich in developing countries: lessons from Latin America.

This article discusses the challenges and potential policy choices for levying progressive taxes and taxing the rich in Latin America, a region known for its high-income inequality, limited tax-collection capacity, and low share of taxes collected from personal income and wealth. Factors such as high exemption thresholds, low top marginal tax rates, and limited administrative capacity undermine the redistributive ability and revenue collection of the tax systems in the region. Moreover, the income composition for the top percentiles largely comes from capital, and the effective tax rates they face are often low due to the preferential treatment of capital income and wealth. After discussing the evidence of how the rich in Latin America respond to progressive taxes on income and wealth and changes in enforcement policy, we provide some insights on potential policy choices to tax them effectively. These may include broadening the income tax base by lowering the number of exempt and non-taxable income items and the statutory exemption thresholds, reevaluating preferential tax rates on capital income, monitoring foreign income, addressing the abuse of tax treatment by business earners, and enhancing tax administration capacity. Additionally, wealth taxes may complement the tax system with updates to property registers and scrutiny of foreign assets.

The impact of intrafirm incentive conflicts on the interplay between tax incidence and economic efficiency

AbstractWe study how corporate taxation interacts with intrafirm incentive conflicts between shareholders and managers and how this interaction impacts the firm's economic decisions and outcomes. In our model, investment under asymmetric information facilitates entrenchment and rent extraction by the privately informed manager. We show that when the future investment payoff is exogenous, a corporate tax cut increases managerial rents, reduces pre‐tax investment profitability, increases the firm's optimal investment hurdle rate, and reduces investment. When the manager can exert upfront project development effort to increase the expected investment payoff, a tax rate reduction not only encourages more effort but also leads the firm to increase the investment hurdle rate to curtail rents. In equilibrium, a lower tax rate always benefits the manager, but the sensitivity of the project's return to the manager's effort determines whether the firm will increase or decrease investment in response to a tax cut, and whether the firm's resulting pre‐tax profit will increase or decrease. Overall, our study shows that intrafirm incentive conflicts can be an important factor in the interplay between tax incidence and economic efficiency, two central themes in corporate tax policy debates.

Corporate Tax Cuts and the Decline of the Manufacturing Labor Share

We document a strong empirical connection between corporate taxation and the manufacturing labor share, both in the US and across OECD countries. Our estimates associate 30 percent to 60 percent of the observed decline in labor shares with the fall in corporate taxation. Using an equilibrium model of an industry where firms differ in their capital intensities, we show that lower corporate tax rates reduce the labor share by raising the market share of capital-intensive firms. The tax elasticity of the labor share depends on the joint distribution of labor intensities and value added at the micro level. Given the empirical distribution in the US manufacturing sector, our quantitative analysis suggests that corporate tax cuts explain a significant part of the decline in the manufacturing labor share since the 1950s. The shift away from traditionally large, labor-intensive production units raised the concentration of market shares and reduced the concentration of employment.

Impact of road load parameters on vehicle CO₂ emissions and fuel economy: A case study in Indonesia

Carbon dioxide (CO2) contributes to the greenhouse effect and global warming. The Indonesian government has introduced a reduction in vehicle taxes based on the number of CO2 emissions, meaning that lower CO2 emissions result in lower tax rates. To measure the CO2 emissions, vehicle testing can be conducted on a chassis dynamometer using road load (R/L) parameters to assess the vehicle's loading during the test. The United Nations Economic Commission for Europe (UN ECE) Regulation no. 101 (R101) provides predefined table values for testing, but vehicle manufacturers can also provide their own R/L values, known as actual R/L. In this study, the vehicle underwent two tests: one using the R/L values from the standard table R101 and another using the actual R/L values provided by the manufacturer through coast-down results. By employing the actual R/L values, CO2 emissions can be reduced by up to 7.3 %. This reduction is achieved by lowering the vehicle's load by up to 17 % to enable optimal vehicle performance. Additionally, there is a potential improvement in fuel economy of up to 7.9 % for vehicles. These findings can serve as a reference for establishing future standard testing procedures.

The Role of Tunneling in Doing Transfer Pricing

Transfer pricing practices carried out by companies by shifting profits from countries with high tax rates to countries with low tax rates, so as to minimize the tax burden in an effort to maximize company profits. In fact, tax revenue on income from multinational companies is a very significant part of tax revenues in the total tax revenues in the countries where these multinational companies operate. This study aims to determine the effect of profitability and taxes on transfer pricing with tunneling as a moderation variable. The study used secondary data as many manufacturing companies listed on the Indonesian Stock Exchange in 2019-2022. Sample selection using purposive sampling method which resulted in 40 manufacturing companies. This study used linear regression analysis with SPSS tools. The results of this study show that profitability and taxes have a significant positive effect on transfer pricing. Furthermore, tunneling is able to moderate the effect of profitability and taxes on transfer pricing.

A leap of faith that echoes well? The value impact of Chinese firms starting up business overseas

We investigate the impact of greenfield outward foreign direct investment (GODI) by Chinese firms on their subsequent Tobin's Q. Our findings indicate that Chinese listed companies from 2003 to 2019 generally experience a significantly positive boost in perceived firm value (or growth prospects) when engaging in overseas business start-ups (i.e., with no foreign partners) when compared to their inactive peers. The positive GODI effect is more prominent among privately owned enterprises vs. state-owned enterprises (SOEs). Our mechanism tests indicate that lowered effective tax rates and reduced illiquidity due to conducting greenfield ODI serve as the value-enhancing channels. Possibly driven by political objectives, SOEs tend to prioritize developing and Belt-Road countries as the destination for their greenfield overseas endeavors.

The hidden menace of smokeless tobacco in Pakistan: understanding the risks and possible solutions; a letter to the editor

The hidden menace of smokeless tobacco in Pakistan: understanding the risks and possible solutions; a letter to the editor

The Advantages and Disadvantages of Taxation Strategies Applied on MNEs in the European Union

Abstract In the context of globalization, the advantages and disadvantages of the taxation strategies of multinational companies include the scope of taxes collected at the state budget, as well as foreign direct investment inflows, both having the possibility to influence economic growth directly or indirectly. In this paper, we tested with unifactorial linear model the theory that direct investment inflows have an insignificant impact on economic growth as well as the impact of collected taxes on economic growth. The research was carried out on four member states of the European Union, namely Germany, France, Romania and Bulgaria, and the data collected covered the period 2012-2021. The research results highlighted that a developed country that has a lower tax rate generated more foreign direct investment inflows and less corporate taxes collected at the state budget than a developed country that has a much higher tax rate, but taxes had a larger contribution to GDP growth when we consider only this variable. On the other hand, a developing country with an average tax rate but a larger economy generated more foreign direct investment inflows and more taxes collected at the state budget than a country with a lower rate and a smaller economy.

Ставки бюджетоутворюючих податків в Україні: чи доцільне радикальне зниження?

In the context of Russian Federation's full-scale war against Ukraine, the idea of conducting a radical tax reform in our country, which would provide for the establishment of corporate income tax, personal income tax and VAT rates at the same level of 10%, has become widespread, and later transformed into the idea of an "anti-corruption" tax reform. According to the reform’s supporters, lowering the rates of the main taxes will ensure the de-shadowing of the economy, destroy the grounds for corruption, and on this basis will lead to an increase in tax revenues, if not in the first year of the reform, then at least in the short term. Optimistic forecasts regarding the fiscal consequences of a radical reduction in the rates of main taxes in Ukraine are based on simplified ideas about the impact of the size of tax rates on the scale of the shadow economy and tax revenues. The purpose of the article is to refute these ideas by revealing, using the results of theoretical and empirical studies, the ambiguous nature of the relationship between tax rates and the size of the shadow economy and tax revenues. A comparative analysis of the rates of VAT, personal income tax, corporative income tax and social security contributions in Ukraine and the EU countries has been carried out, which allows to establish that none of the EU countries has ever introduced low rates for all major taxes and social security contributions, reduced the VAT rate to the level of minimum EU requirements (15%), or refused to finance pension payments through social security contributions, distributing their burden between employers and employees. The author analyzes the impact of tax rates, tax burden and other factors on the level of the shadow economy and establishes why lower tax rates do not guarantee a reduction in the scale of informal activities. The absence of a direct link between the size of tax rates and corruption is substantiated. Based on the analysis of the arithmetic and economic effects of tax rate cuts, the author determines their ambiguous impact on tax revenues. A comparative analysis has been made of the fiscal efficiency of the taxes whose rates are proposed to be reduced and of the compensating taxes, and the impossibility of compensating budget losses by increasing these taxes is substantiated. The author concludes about the high fiscal risks of a radical reduction in the rates of budget-forming taxes in general and the impossibility of such a reduction during the war.

Trends and Prospects of Collecting Tax Revenues of Consolidated Budget in Russian Federation

Introduction. Tax revenues are one of the main elements of any country's budget, and their correct accounting and forecasting allows public authorities to form the expenditure part of the budget. In the modern scientific literature, not enough attention is paid to the trends in the collection of tax revenues in 2022. after the introduction of a large number of sanctioned economic and political restrictions of unfriendly states. Methodology. The object of research in the work is the consolidated budget of the Russian Federation, the dynamics and structure of its revenues and the effectiveness of its formation in 2022 are studied. Results. Based on a comprehensive assessment, the article clarifies the role of tax revenues in the formation of the consolidated budget of the Russian Federation, reveals the features of the tax burden on taxpayers in modern conditions of economic and political sanctions of unfriendly countries, analyzes the dynamics and structure of tax revenues of the consolidated budget of the Russian Federation from 2019 to 2022, identifies current trends and problems of the tax system and proposes a set of measures optimization of tax collection in the revenue part of the consolidated budget of the Russian Federation. Conclusions. In modern conditions, the level of business activity of taxpayers is significantly influenced by the tax burden. That is, as a result of reducing the tax burden on the taxpayer, his business activity increases, which means that the gross domestic product of the country as a whole increases. In our opinion, in 2023, under the conditions of economic and political sanctions of unfriendly states, within the framework of state tax policy, it is necessary to continue stimulating the increase in business activity of taxpayers through the mechanism of reducing the tax burden on them by providing various tax benefits in the form of tax holidays and lowering tax rates.

Incentives, globalization, and redistribution

We offer a new explanation for why taxes have become less redistributive in many countries while the concentration of incomes has increased. Our argument is based on the prevalence of incentive contracts in modern economies, in conjunction with increased product market integration. Globalization widens the spread of project returns and makes contract choices more responsive to tax changes. This can result in a lower optimal income tax rate while simultaneously increasing the income share of top earners. These results are confirmed in a calibrated version of our model based on U.S. income data.

Law enforcement and the size of the informal sector

This study presents cross-country evidence indicating that the relationship between the size of the informal sector and tax rates is ambiguous. Motivated by this finding, a standard two-sector model is augmented with endogenous law enforcement, which depends on the size of the informal sector and government expenditure. Additionally, based on microdata from Colombia, taxes and law enforcement are necessary to match the observed size of the informal sector. Meanwhile, the dependence of law enforcement on government expenditure creates a non-linearity in the form of a Laffer curve. Therefore, lowering tax rates would not necessarily reduce the size of the informal sector.

Pengaruh Kepemilikan Asing, Kualitas Audit, Dan Effective Tax Rate Terhadap Transfer Pricing

This study aims to determine the effect of foreign ownership, audit quality and effective tax rate on transfer pricing. This study uses a sample of mining companies listed on the Indonesia Stock Exchange (IDX) during the 2018-2021 period. The sampling method used purposive sampling with criteria set by the researcher so that a sample of 24 companies was used in this study. Management of data in research using multiple linear regression. The results of this study indicate that foreign share ownership has an effect on transfer pricing, audit quality and effective tax rate have no effect on transfer pricing. The contribution in this study empirically explains the relationship between foreign ownership using the percentage of foreign share ownership, audit quality using a dummy variable by determining a sample of company financial statements that are audited by big four KAP with a value of 1 and non-big four KAP with a value of 0, and the effective tax rate using the expense ratio current tax with pre-tax profit. This research provides information for the government to be able to decide on a policy of strict sanctions in overcoming problems related to tax suppression and stakeholders in the company can monitor the company's transaction activities with related parties in countries with low tax rates.
 Keywords: Foreign Ownership, Audit Quality, Effective Tax Rate, Transfer pricing

Tax Knowledge Diffusion Through Shared Audit Partners: Evidence From China

This study investigates how tax knowledge is diffused through auditors at the individual partner level. We find that firms sharing the same audit partner with low-tax firms exhibit lower effective tax rates ( ETRs) but not for firms that share the same audit office but with different partners. Using a difference-in-difference (DID) research design, we show that firms’ ETRs decline significantly after their existing audit partners start auditing a low-tax firm. Our findings suggest that the transfer of tax planning knowledge from low-tax firms to focal firms occurs mainly through common individual partners. Moreover, benefits to focal firms are stronger when their top executives have a social connection to the shared partners. Further analysis shows that audit partners are more likely to retain existing clients and charge higher audit fees for tax planning diffusion, indicating how audit partners benefit from sharing tax planning knowledge with their clients.

Financial attributes and corporate tax planning of listed manufacturing firms in Nigeria: moderating role of real earnings management

Purpose Some researchers regard discretionary accrual (DA) as one of the factors that drive corporate managers to conduct tax planning (Scott, 2009; Basri and Buchari, 2017). Based on agency theory and positive accounting theory, corporate managers can transform accounting information and manipulate firm earnings to reduce tax liability. There is a lot of research concerning earnings management and tax planning in the developed economy. These studies include Wang and Chen (2012) and Pettersson and Wu (2015). In the emerging economies, it includes Jamei and Khedri (2016), Kurniasih and Sulardi Suranta (2017), Prastiwi (2017), Almashaqbeh et al. (2018), Bayunanda et al. (2018), Rani et al. (2018) and Kałdoński and Jewartowski (2019). It is important to note that none of the research mentioned above has evaluated the impact of real earnings management (REM) on tax planning in Nigeria. While in the developed economy only Kałdoński and Jewartowski (2019) used REM as an explanatory variable, while the majority of studies used DA. Consequently, no study has used REM to moderate the relationship between financial attributes and tax planning. Despite the widespread notion, as well as positive accounting theory, tax planning theory that financial attributes (profitability, leverage, liquidity and firm growth), REM and DA motivate tax planning, previous investigations have produced mixed results (Dwenger and Steiner, 2009; Wang and Chen, 2012; Chen and Zolotoy, 2014; Aghouei and Moradi, 2015; Pettersson and Wu, 2015; Ribeiro, 2015; Chen et al., 2016; Jamei and Khedri, 2016; Ogbeide, 2017; Yuniawati et al., 2017; Chen and Lin, 2017; Firmansyah and Febriyanto, 2018; Prastiwi, 2018; Rani et al., 2018; Kibiya and Aminu, 2019; Kałdoński and Jewartowski, 2019 and Siyanbonla, 2021). This study aims to use REM as a moderator to examine the relationship between financial attributes and tax planning whether it will strengthen or weaken the relationship. Design/methodology/approach The study examines the impact of financial attributes on the corporate tax planning of listed manufacturing firms in Nigeria. It also tests for the moderating effect of REM on the relationship between financial attributes and tax planning. Data for the study was sourced from the annual reports of sampled manufacturing firms. The study used the panel data methodology for analysis. The study used fixed effect estimation to interpret the parsimonious model and random effect was used to interpret the moderated model. The study documented that financial leverage has a positive significant influence on the tax planning of the sampled manufacturing firms. While firm growth has a negative significant impact on the tax planning of listed manufacturing firms in Nigeria. REM has a positive significant impact on tax planning. Also, REM moderate significantly the relationship between financial attributes on one hand and tax planning on the other. The study recommends that firms should go for more debt to take advantage of the tax shield of interest on the debt. Also, firm management should use non-current debt to finance non-current assets and use current debt to finance current assets to avoid the risk of taking over or liquidation. The study also recommends that firm management should engage in intercompany and intracompany transactions by selling their goods to affiliates in countries with low prices and low tax rates. A firm should also overproduce goods to have high production costs and high closing inventory since real earning management significantly reduces tax liabilities by deferring income into a later year. Findings The study documented that financial leverage has a positive and significant influence on the tax planning of the sampled manufacturing firms. While firm growth has a negative but significant impact on the tax planning of listed manufacturing firms in Nigeria. REM has a positive and significant impact on tax planning. Also, REM moderate significantly the relationship between financial attributes on one hand and tax planning on the other. Originality/value There is a lot of research concerning earnings management and tax planning in the developed economy. These studies include Wang and Chen (2012) and Pettersson and Wu (2015). In the emerging economies, it includes Jamei and Khedri (2016), Kurniasih and Sulardi Suranta (2017), Prastiwi (2017), Almashaqbeh et al. (2018), Bayunanda et al. (2018), Rani et al. (2018) and Kałdoński and Jewartowski (2019). It is important to note that none of the research mentioned above has evaluated the impact of REM on tax planning in Nigeria. While in the developed economy only Kałdoński and Jewartowski (2019) used REM as an explanatory variable, while the majority of studies used DA. Consequently, no study has used REM to moderate the relationship between financial attributes and tax planning.

Competing multinationals’ backshoring decisions: Tax arbitrage versus production reliability tradeoff

In the post-pandemic era, global supply chains are increasingly experiencing disruptions. To mitigate the effects of production disruptions, many multinational firms (MNFs) are centralising their supply chains by removing production subsidiaries back to the domestic countries (i.e. backshoring), at the expense of tax arbitrage benefits. This study conducts an analytical game-theoretical model to examine competing MNFs’ incentives to backshore, considering the trade-off between tax arbitrage and production reliability improvement. The MNFs’ equilibrium backshoring decisions, corresponding production quantities, and transferring prices are derived. We find that lower geographic tax differences and higher foreign country (or lower domestic country) disruption rates will jointly incentivise the MNFs to backshore; however, this does not guarantee higher expected profits for the two competing MNFs. The setting of symmetric MNFs could also result in the asymmetric equilibrium of backshoring strategy when the disruption risks in the same country are more correlated, which is induced by the competition mitigation incentives. Additionally, we find that backshoring always benefits customer surplus but may be detrimental to social welfare. Moreover, we endogenize the tax rate and investigate the government's tax regulation design problem. A main finding is that inducing MNFs’ backshoring by setting low tax rates would be unwise for the government under some conditions. To check the robustness of the main model, several extensions are also discussed.

Strategies of property developers in the context of carbon tax.

China needs to guide property developers in actively reducing emissions to reach carbon emission reduction targets and respond to global climate change. A carbon tax is an important policy tool. Still, to establish successful rules to steer property developers' reasonable carbon emission reduction behavior, we must first explore property developers' decision-making mechanisms. This study develops an emission reduction and price game model for property developers under the constraint of a carbon tax. It then applies reverse order induction and optimization methods to identify the game equilibrium solution for property developers. Using the game equilibria, we explore the carbon tax mechanism on emission reduction and property developer pricing strategies. We can derive the following conclusions if the carbon tax policy is not implemented: 1.House prices are related to the substitutability of the two types of competitive property developers. 2.The greater the substitutability, the greater the cost of emission reduction paid by consumers. 3.The game equilibrium carbon emission intensity is the average carbon emission intensity of the housing business. In the situation of enacting a carbon tax, we arrive at the following conclusions: 1.The profits of real estate developers who do not have the advantage of emission reduction continue to decline with the increase of carbon tax. 2. For real estate developers who have the advantage of decreasing emissions, profits declined initially and then increased as the carbon tax rate increased, and only when the carbon tax rate reaches Tm1* can they fully leverage the cost advantage and obtain ever-increasing profits. 3.Low tax rates should be adopted by the government at the start of the implementation of the carbon tax policy to provide a buffer time for real estate developers who do not have the advantage of emission reduction costs.

Policy analysis to maximize the firm value: performing firm valuation using system dynamics

PurposeThe purpose of this study is firm value management through corporate finance policy design and scenario analysis to maximize the firm value.Design/methodology/approachThe study develops a system dynamics model for an oil firm and incorporates the financial and physical processes to perform the firm valuation. The model is simulated under the current and alternative investment, capital structure and dividend policies of the case firm, assuming different oil and gas price and tax rate scenarios to identify which combination of policies maximizes the firm value.FindingsThe simulation results suggest that lowering the volume of investments, increasing the debt ratio and reducing the dividend payments from the current level increases the share price, given increased oil and gas price expectations and lower tax rates. However, the total firm value outperforms with increased investments toward the end of the simulation period. In case of decreased oil and gas price expectations, lower volume of investments, lower debt ratio and lower dividend payments increase the share prices, given lower taxes.Originality/valueThis study entails significance as it provides a comprehensive financial planning model for an oil firm, which incorporates the complex interactions of key financial and physical processes of the firm. The study contributes to debates on corporate finance policies by integrating multiple theories, accounting for accumulation processes and feedback loops and their non-linear interactions. The study proposes the consideration of combined impact of policies for firm value management.