Optimal Tax Research Articles

Value-added Tax Neutrality, Corporate Investment and Valuation: Evidence from the Reform of Uncredited VAT Refund

In recent years, the value-added tax (VAT) has been widely adopted as a tax vehicle in developing countries. In the context of national tax reforms, VAT was often adopted to replace the more complicated tax systems for selling goods and services. Given the growing interest in VAT, it is necessary to evaluate issues and principles that are relevant to developing countries. The main objective is to evaluate the experience of developed and developing countries adopting this tax and to collect useful lessons from these experiences to guide tax reform in developing countries. The research provides a cross section of the questions and describes the state of knowledge on VAT. Thus, researchers and policy-makers can assess the direct relevance of VAT to developing countries with different levels of administrative capacity. The collected funds are expected to contribute to improving taxation and promoting effective resource allocation in developing countries. The work provides broad guidelines for improving the design and administration of VAT refund mechanisms across various areas of VAT management, reflecting international good practices. Firstly, it analyzes the results of a brief survey of tax refund practices in selected countries at various income levels, and reflects its advice. Secondly, it provides recommendations for countries to improve VAT refund management. Thirdly, it offers suggestions for countries that should develop strategies to tackle VAT refund fraud and improve tax revenue forecasts and strengthen treasury cash management.

Housing Taxation and Economic Growth: Analysis of a Balanced-Growth Model with Residential Capital

Abstract Using a neoclassical model with endogenous growth, this study examines the effects of increasing housing taxation and eliminating the mortgage interest tax deduction on economic growth and household welfare in the United States. The optimal tax policy reduces taxation of income in favor of increased taxation of housing and consumption. This policy increases the growth rate by 0.49 percentage points. In addition, simply shifting the tax burden by reducing the tax rates on productive forms of capital toward housing can increase the growth rate up to 0.18 percentage points. This study also find that eliminating the income tax deduction on mortgage interest and lowering income taxes would increase growth by about 0.016 percentage points. Each of these proposed policies improves household welfare.

Vulnerability to tax enforcement and spillovers of corruption: cross-industry evidence from China

Abstract The article investigates the cross-industry spillover effect of tax enforcement and corruption. I propose a two-sector optimal tax administration model by incorporating vulnerability to tax enforcement (VTE) and corruption into the Allingham–Sandmo framework. Based on two large surveys of Chinese firms, I test the model by using industrial capital-intensity as a proxy for firms’ VTE and exploiting turnover of prefectural secretaries of the Communist Party of China between 2000 and 2007 as a driving force of corruption. The findings suggest capital-intensive industries, which are vulnerable to tougher enforcement, pay higher effective tax rates, and, therefore, have stronger incentives to bribe in order to reduce their tax burden. The bribery produces negative spillovers that raise the effective tax rates of their labor-intensive counterparts. Further evidence confirms that older prefectural secretaries are prone to be corrupt and exhibit stronger tenure effects both on the effective tax rates and on firms’ corruption expenditure (JEL H21, H26, H32, D22, D73).

Analysis and Justification of the Choice of a Simplified Taxation System for Sustainable Development of Small and Medium-Sized Businesses

Sustainable business development involves, among other things, the choice of the optimal taxation system. The study provides specific practical recommendations for choosing a simplified taxation system. The authors compared two taxation systems in Ukraine in an accessible visual form: common and simplified, highlighted the advantages of the simplified one and developed practical recommendations for choosing a taxation system. In particular, the authors developed an Algorithm for justifying the transition to a simplified taxation system and also presented and described in detail the Sequence of actions during the transition to a simplified taxation system. A feature of the study is the lack of an expanded theoretical base in favour of methodological justification, namely the use of official documents: the Tax Code of Ukraine and other legislative acts relating directly or indirectly to the taxation of a private entrepreneur. Thus, the proposed recommendations can help the entrepreneur choose a simplified taxation system, which will significantly speed up the process of interaction with the client and reduce the subjective factor.

Inter-temporal decisions, optimal taxation and non-compliant behaviors in groundwater management

A sizable part of the water extracted is unauthorized. This phenomenon may contribute to exacerbate the problem of groundwater over-exploitation. To consider both issues, we study the interaction between the water agency and farmers through a leader–follower differential game in which both agents are perfect foresight. Since the farmers have to pay a tax on individual withdrawals imposed by the water agency to manage the groundwater, illegal behaviors may arise to save this cost. However, if discovered, the farmers are punished with an administrative sanction. The game is solved using feedback Stackelberg solution. Moreover, to enrich the model’s policy suggestions, we also consider an alternative context in which farmers can adopt a trigger strategy. Finally, we perform numerical simulations based on the western La Mancha (Spain) aquifer data to better understand both the analytical results and the effects of the sanction mechanism on non-compliant behaviors.

Maximizing financial benefits of investment tax allowances in renewable energy portfolios

ABSTRACT Policy makers offer fiscal incentives to encourage companies to invest in renewable technologies. This work considers generation companies that take advantage of fiscal incentives to minimize income tax. Thus, a novel mixed-integer linear optimization model that minimizes total tax payments of a company owning a portfolio of energy projects is designed. The model strategically manages depreciation, tax loss carryforward, and tax incentive use for minimizing discounted income tax. A set of revenue scenarios was employed to analyze model results. The proposed model yields tax savings between 8.2% and 19.2% of the company’s taxes. Tax savings are significantly larger for companies with a large generation portfolio; which represents a clear advantage over small generation companies. The proposed model can also be employed by policy makers to adjust future ITA policies by taking advantage of the anticipative knowledge of the optimal tax strategies implemented by generation companies.

Optimal carbon taxation and horizontal equity: A welfare-theoretic approach with application to German household data

We develop a model of optimal taxation and redistribution under an ambitious climate target. We take into account vertical income differences, but also explicitly capture horizontal equity concerns by considering heterogeneous energy efficiencies. By deriving first- and second-best rules for policy instruments including carbon and labor taxes, transfers and energy subsidies, we investigate analytically how vertical and horizontal inequality is considered in the welfare maximizing tax structure. We calibrate the model to German household data and a 30 percent emission reduction goal and show that redistribution of carbon tax revenues via household-specific transfers is the first-best policy. Under plausible assumptions on inequality aversion, transfers to energy-intensive households should be about five times higher than transfers to energy-efficient households. Equal per-capita transfers do not require to observe households’ efficiency type, but increase equity-weighted mitigation costs by around 5 percent compared to the first-best. Mitigation costs increase by less, if the government can implement a uniform clean energy subsidy or household-specific tax-subsidy schemes on energy consumption and labor income that target heterogeneous energy efficiencies. Horizontal equity concerns may therefore constitute a new second-best rationale for clean energy policies or differentiated energy taxes.

Does labour income react more to income tax or means‐tested benefits reforms?

I provide estimates of compensated elasticities of labor income with respect to the Marginal Net-of-Tax Rate on the 2006–2015 period for France, exploiting not only income tax reforms but also means-tested benefits reforms. I use semiparametric graphical evidence and a classic 2SLS estimation applied to a rich data set including both financial and socio-demographic variables. I obtain an estimated compensated elasticity on the intensive margin around 0.2-0.3 in response to income tax reforms, around 0.1 in response to in-work benefit reforms, while I found no statistically significant response to family allowance reforms. I show that the difference between elasticities contradicts the theoretical prediction of the classical labor supply model. These asymmetric responses are very robust to a large number of robustness checks. The most plausible explanation is that income tax reforms are more salient and better perceived than benefit reforms. I also highlight an average compensated elasticity of 0.1 for all transfers on the intensive margin and provide heterogeneous elasticities depending on types of people, which could be used for optimal tax analyses. This article is protected by copyright. All rights reserved

Net operating loss policies in Poland – a tool for tax neutrality and a firm’s antifragility

Abstract The purpose of the article is to check the impact of Net Operating Loss Policies (NOL) for firms. Net Operating Loss Policies (NOL) are a central fiscal tool because they enable firms to be taxed on their average profitability over time. A complete NOL policy has 4 dimensions: a NOL carry-forward (1), carry-back (2), unlimited in time (3) and with the time value of money (4) taken into account. No country applies a complete NOL policy. To evaluate the impact of all dimensions of NOL policies, Polish firm data from 41 sectors from the BACH database over ten years, from 2011 to 2020, are analysed. The results show that the change observed in the effective tax rate is positive with a complete NOL policy. In such case, firms pay less CIT in total, showing that the state will earn less, but should get more stability from firms which will hoard more cash. More investments or firms with more equity could be reached, strengthening the state’s stability. The variance confirms such intuition, an earlier use of a full or almost full fiscal deficit logically means a higher effective tax rate in years to come (but less in gross terms).

Homeownership Investment and Tax Neutrality: a Joint Assessment of Income and Property Taxes in Europe

Western countries’ income tax system exempts the return from investing in owner-occupied housing. Returns from other investments are instead taxed, thus distorting households’ portfolio choices, although it is argued that housing property taxation might act as a counterbalance. Based on data drawn from the Statistics of Income and Living Conditions and the UK Family Resources Survey, and building on tax benefit model EUROMOD, we provide novel evidence on the interplay of income and property taxation in budgetary, efficiency and equity terms in eight European countries. Results reveal that, even accounting for recurrent housing property taxation, a sizeable ‘homeownership bias’ i.e. a lighter average and marginal taxation for homeownership investment, is embedded in current tax systems, and displays heterogeneous distributional profiles across different countries. Housing property taxation represents only a partial correction towards neutrality.

RETRACTED: Carbon pricing and environmental response: A way forward for China’s carbon and energy market

Addressing the conflict between fossil fuel exploitation, usage, and greenhouse gas emissions is a top priority for China’s low-carbon socioeconomic development. Scalable Axisymmetric Matrix “a computerized general equilibrium model” is used to assess the impact of carbon tax policies on energy usage, carbon pollution, and macroeconomic drivers at reduction levels of 10%, 20%, and 30% of emissions. In the meantime, we examine the impact of various carbon tax recycling schemes in line with the tax neutrality concept. Although the carbon tax successfully reduces carbon emissions, we conclude that it will have a detrimental effect on the economy and social well-being. To cope with China’s increasing pollution emissions and ecological imbalances, the Chinese government promulgated the environmental protection tax law of the people’s Republic of China, which was officially implemented in 2018. Although carbon dioxide is not included in the Taxable Pollutants and Single Quantity Table attached to this law, China has almost reached a consensus on taxing carbon emissions. In 2021, the State Council of China issued the opinions on completely, accurately, and comprehensively implementing the new development concept and doing a good job in carbon peak and carbon neutralization, which made a comprehensive deployment to achieve the “double carbon” goal and improved the carbon tax policy and legal system, which is an essential part of it. Therefore, based on fiscal neutrality, an effective carbon tax recycling scheme can mitigate the adverse effects of its adoption. However, due to the current development in China’s energy-generating and transportation sectors, even minor steps can have huge effects on emissions with marginal economic implications.

A Stackelberg game model with tax for regional air pollution control

The command-and-control regulation is likely inefficient and costly. This study investigates a regional pollution control scheme with tax (RPCST) under which the central government sets the tax rate under a given pollutant reduction quota and local governments determine their pollution removal rates based on the central government’s policy. First, a one-leader-multi-follower (OLMF) Stackelberg game model is formulated, in which the central government is the leader and the local governments are the followers. Then, a procedure based on bilevel programming and relaxation method is applied to solve the OLMF model. Finally, a case study analyzing the SO2 reduction of the Yangtze River Delta in China is conducted to demonstrate the effectiveness of the RPCST. The results show that RPCST works better than the current command-and-control scheme. Our analysis provides a guideline for governments to design optimal tax schemes to effectively solve the regional air pollution crisis.

Gini and Optimal Income Taxation by Rank

We solve the nonlinear income tax program for rank-dependent social welfare functions, expressing the trade-off between size and inequality using the Gini and related families of positional indices. Absent bunching, ranks in the actual and optimal allocations are invariant. Exploiting this feature, we provide new, simple, and intuitive tax formulas for both the quasilinear and additive cases and new comparative static results. Our approach makes insights from optimal taxation more widely accessible. In some of our simulations the actual US tax policy is close to being optimal—except at the top, where optimal rates are much higher than in actuality. (JEL D31, D63, H21, H24, K34)

Research on C2C e-commerce taxation based on mixed decision game

The rapid rise of C2C e-commerce in China has brought serious difficulties to China's tax collection and management. Based on the principle of progressive taxation, the necessity of Taxation on C2C e-commerce is analyzed and discussed. It is shown that the absence of Taxation in C2C e-commerce is contrary to the principle of tax equity and tax neutrality, and the tax revenue is lost.It is demonstrated that it is imperative that China to implement C2C e-commerce taxation in a comprehensive and standardized way. By constructing a hybrid decision game model between C2C business operators and tax authorities, the static game analysis of incomplete information is conducted for the balance of interests between tax authorities and e-commerce operators.

THE IMPACT OF BALANCING DOMESTIC AND FOREIGN TAX SYSTEMS ON ALLEVIATING TAXPAYERS' INEQUALITY AND ANXIETY

Abstract Background The economy of China has gotten impressive change in recent years, to which personal income got many times higher than before correspond. Global economy also had a great impact to China. There are more foreigner applied China’s Visa and work or live in China. How could their personal income income be levied, same or different with Chinese? Same or different with previous income tax policy? Personal income tax is the most concern of all natural taxpayers, which is directly related to the amount of personal net income, which impacted the living cost plan. Under the current situation that China strengthens the introduction of returnees who have gotten great achievement in certain business and research field and the tax administration of personnel outside the enterprise, there are now a large number of domestic and overseas taxpayers in group of the natural taxpayers. However, from 1998 to now, due to the personnel income huge gap between domestic and foreigner who were invited to work in China, there have been policy differences between domestic and foreign personnel in China's personal income tax payroll and salary foreign-related tax policies, which has resulted in the psychological inequity of taxpayers and caused the psychological inequity and social anxiety of domestic personnel. Subjects and Methods In this paper, the official tax data is selected, and the case of Appendix 4 in S.D.S.H. [2014] No. 65 document is taken as an example to use specific income data to generate different tax burden differences and impacts on the differences between domestic and foreign taxpayers under the same income, shows the unfair consequence according the present personal income tax policy. Results From these tax differences, it is found that there are still some problems in China's tax policy corresponding to personal income tax wages and salaries, such as tax unfairness caused by repeated deductions, additional deductions and tax exemption items for foreigners, which negatively affect the efficiency of talent policy, etc., and the psychological unfairness and social anxiety to domestic taxpayers are discussed. Conclusions Finally, the policy suggestions to improve the tax policy and link taxpayers' psychological injustice and social anxiety are put forward: According to the new talent policy which induced the high-level experts despite of their nationalities and the change of economic environment in which China’s GDP have been almost the advanced country group and individual income went up higher, China should make the fair tax policy, avoid repeated deductions, cancel additional deductions and tax exemption items for foreigners, and improve the corresponding tax system from the perspectives of improving tax fairness and efficiency, maintaining tax neutrality and simplifying the tax system. The range of data income levels selected in this paper is not comprehensive enough, and there is no specific research on ultra-high income groups.

Optimal Taxes under Private Information: The Role of Inflation

AbstractOnce explicit information available to the taxing authority and incentives associated with private information problems are explicitly taken into account, only a limited set of policy instruments are consistent with agents not engaging in side trades. Within this spirit, we study the role of taxes and inflation in minimizing the dead‐weight loss associated with the provision of good incentives and other market imperfections when fiat money is essential. When the government has a rich information set and can observe savings, effort, and consumption in frictionless markets, the constrained efficient allocation can be achieved with affine history‐dependent consumption taxes. Thus, monetary policy is redundant. In contrast, when the government observes sales, rather than actual consumption, a tax arbitrage exists. Uniform affine consumption taxes prevent side trades. We also find that a deviation from the Friedman rule is optimal as it helps induce truth‐telling and alleviate a pecuniary externality. However, optimal monetary and fiscal policies in this setting cannot implement the constrained efficient allocation.

Optimal Taxation with Endogenous Default under Incomplete Markets

How are the optimal tax and debt policies affected if the government can default on its debt? We address this question from a normative perspective in an economy with noncontingent government debt, domestic default, and labor taxes. On one hand, default prevents the government from incurring future tax distortions associated with servicing the debt. On the other hand, default risk gives rise to endogenous credit limits that hinder the government's ability to smooth taxes. We characterize the fiscal policy and show how the option to default alters the near–unit root component of taxes in the economy with risk-free borrowing. (JEL D52, E62, H21, H24, H63)

Polityka podatkowa na rzecz odbudowy gospodarki i zrównoważonego rozwoju po pandemii COVID-19

The optimal taxation level and tax structure depend on numerous factors and enormously differ from country to country. However, the two mentioned tax policy instruments could ensure economic recovery and sustainable economic growth. This article aims to examine the effects of tax policy on economic development and evaluate the role of appropriate tax instruments in speeding up recovery. The results showed that tax level harms the GDP per capita growth rate in Central Europe and Baltic states over the 2000-2021 period. Another vital finding is the increase in both overall employment and investment to GDP ratio positively affected the real GDP per capita growth rates. In order to foster economic growth government might use tax cuts and other stimuli both for distortionary and non-distortionary taxes. The tax policy’s institutional potential should be improved to neutralize the adverse effects of COVID-19 impact and enhance macroeconomic sustainability. JEL Classification: H20, H21, O23

Ineffectiveness of carbon cap-and-trade market

Under neoclassical assumptions, this paper develops a model to illustrate the effects of government use of carbon allowances for carbon emission control. We find that control using the instrument of issuing long-term carbon allowances does not produce the same good results in the Decentralised Equilibrium as in the Planning Problem. Thus, while Coase's Theorem ensures that the Pareto optimum is maintained in an economy with multiple agents, it does not align the social development with the economic optimum of the planner. We believe this is due to the that the price of carbon allowances is determined by asset profiles of investors rather than externalities. The steady-state under the special pathway shows that consumption is determined by the rate of technological progress, the total amount of carbon dioxide at steady-state, the level of technology at which steady-state is reached and the total amount of carbon allowances remaining. The comparison with the optimal tax path reveals that the price of carbon allowances has increased too quickly, leading to excessive consumption of fossil fuels in the early stages.

Modeling the Linkage between Vertical Contracts and Strategic Environmental Policy: Energy Price Marketization Level and Strategic Choice for China

The lower price of energy leads to higher coal consumption in China. The idea of an “environment-for-trade policy” could be used to achieve an international competitive advantage, which, in turn, has important implications. To address the issue, we develop properties to examine the link between the low price of energy and strategic environmental policy in China and investigate the choice of policy instruments in a strategic environmental policy model with vertical contracts. In addition, to contribute to the literature on strategic environmental policy, this paper also develops properties to investigate different choices of instruments for the environmental policy and includes the degree of energy marketization for the wholesale price in the study. To do so, we assume that the wholesale price of the polluting input increases with the market price. By using this assumption, this paper analyzes the effects of two instruments of the environmental policy on social welfare and concludes that there is no reason to expect both downstream and upstream firms to establish a high wholesale price. Due to the low level of marketization, when the government selects an emission tax as the policy instrument, the optimal tax rates should be higher than the marginal damage of emissions. However, the optimal resource tax is uncertain when its effect on environmental damage is taken into account. In other words, the resource tax is ineffective as a policy instrument. Our results can be used to draw some practical policies for countries to use their energy effectively. To promote energy sustainability, governments should liberate resource prices and reform the system to get efficient environmental policies.