Personal Income Tax Rates Research Articles

Capital Gains Taxation under Different Tax Regimes

This paper investigates the influence of different systems of current income and capital gains taxation on investor's decision to either carry out an investment in corporate shares or to invest funds alternatively on the capital market. Three basic tax systems are analyzed, a classical corporate tax system with double taxation of profits on corporate and personal level, a shareholder relief system, that reduces double taxation completely. It can be shown that general analytical solutions for the investment problem for different categories of tax regimes, even under certainty, cannot be derived. Applying a growth model, we find under rather restrictive assumptions that the shareholder relief system invokes more severe distortions than the full imputation system. Trying to prove this in a more realistic setting with uncertainty we employ Monte Carlo Simulation for random rates of return and random income tax rates. In many cases, the degree of tax-induced uncertainty is significantly lower under a shareholder relied system than under full imputation. Furthermore, it can be shown that under uncertainty full imputation causes more severe distortions than shareholder relief whenever personal income tax rates are low. In light of international tax competition this is an important result as a reduction of tax rates is taking place or is likely to take place in several countries. Furthermore, the simulation clarifies the trade-off of the opposing effects, i.e. tax and interest rate effects, and the overwhelming impact of capital gains taxation. Apart from tax parameters, we identify the dividend rate and the point in time of selling the shares as important value drivers.

Have State Tax Interdependencies Changed Over Time?

The literature investigating strategic tax competition among U.S. state has shown significant variation in terms of the magnitude, and even the sign, of tax competition effects. One dimension upon which variation in results may occur is the period of analysis. It is plausible that tax competiveness may change over time as the economic environment changes, and as such, an investigation into dynamic strategic tax responsiveness may be of value. We systematically examine whether, and to what extent, tax interdependencies have changed over time using a series of spatial regression models using a panel of state-level data covering U.S. states from 1978 through 2006. Results consistently provide evidence that the degree to which states change personal income tax (PIT) rates in response to changes in neighboring states diminished over much of the period of analysis. Results provide some evidence that responsiveness in setting sales tax rates also changed.

Efekty wprowadzenia dwóch stóp w podatku dochodowym od osób fizycznych w 2009 roku

Efekty wprowadzenia dwóch stóp w podatku dochodowym od osób fizycznych w 2009 roku

The Influence of Labour Taxes on the Migration of Skilled Workers

AbstractThis paper investigates empirically the role of taxes on labour for the stock of expatriates and the migration flows of skilled workers. Given the increasing mobility of labour, especially of high‐skilled people and expatriates, it is interesting to see to what extent labour income taxes and social security contributions determine migration flows. We collect data on personal income tax profiles for 49 economies and the year 2002. In particular, we determine the component of labour taxes which is borne by employers and that which is borne by employees, following the OECD's Taxing Wages Approach. For the latter, we calculate the progressivity of personal income tax rates between the average wage and five times the average wage. This may be interpreted as the tax progression which is relevant for well‐paid workers. Then, we use the personal income tax variables to estimate their effect on bilateral stocks of expatriates into OECD countries and the migration of skilled workers into these countries. Personal income tax rates turn out to have a robust negative effect on cross‐border flows of skilled workers in the OECD.

Corporate taxation in the OECD in a wider context

Against the background of increased globalization statutory corporate tax rates have shown a clear downward trend over the last two decades. The sharp decline in these rates was accompanied by substantial tax base broadening and a comparable reduction in personal income tax rates only until the early 1990s. This suggests that corporate tax competition is of increasing importance. So far corporate tax revenues remain fairly stable. But an analysis of corporate taxation in the context of the overall tax systems shows that a substantial shift towards value-added taxes has taken place. While the trends so far have been driven by smaller European countries, recent tax reforms indicate that increasing tax competition is inducing a shift towards consumption taxes even for larger economies.

Incorporation and Taxation: Theory and Firm-Level Evidence

This paper provides theory and firm-level evidence on the incorporation decision of entrepreneurs in a model of corporate governance and taxation. The theory explains how the incorporation decision of entrepreneurs is driven by taxation (corporate and personal income taxes), corporate transparency, access to external capital and limited liability. We estimate features of this model using a large cross-section of more than 540, 000 firms in European manufacturing. The impact of taxation on the incorporation decision is at the heart of this analysis. We find that higher personal income tax rates and their progression are associated with an increase in the probability of incorporation, while higher corporate tax rates entail an impediment to incorporate. This finding is robust to the inclusion of other economic and institutional determinants and to a variety of functional form assumptions about the latent variable in the estimated discrete choice model.

The Influence of Labor Taxes on the Migration of Skilled Workers

This paper investigates empirically the role of taxes on labor for the stock of expatriates and the migration flows of skilled workers. Given the increasing mobility of labour, especially of high-skilled people and expatriates, it is interesting to see to what extent labour income taxes and social security contributions determine migration flows. We collect data on personal income tax profiles for 49 economies and the year 2002. In particular, we determine the component of labor taxes which is borne by employers and the one that is borne by employees, following the OECD's Taxing Wages Approach. For the latter, we calculate the progressivity of personal income tax rates between the average wage and five times the average wage. This may be interpreted as the tax progression which is relevant for well-paid workers. Then, we use the personal income tax variables to estimate their effect on bilateral stocks of expatriates into OECD countries and the migration of skilled workers into these countries. Personal income tax rates turn out to have a robust negative effect on cross-border flows of skilled workers in the OECD.

A Scheme to Determine Tax Rates Fairly and Quantitatively

Abstract. This article discusses a scheme to quantitatively determine a personal income tax rate structure based on the principle of democratic voting. Previous attempts to apply the majority voting rule largely call for voting on predetermined tax positions. In the approach presented here, each taxpayer proposes an egocentric rate system encompassing his or her own obligation as well as all other taxpayers' under generally accepted constraints. The egocentric rate systems proposed by all taxpayers are weight‐averaged to determine the actual tax obligation for all taxpayers. The weights used for the average are in general proportional to the tax contribution. The rate structure can be quantitatively determined from solving simultaneous equations if the weights are predetermined. Although there are an infinite number of choices for the weights, it is argued that the “fair” manner of averaging ranges from equal representation by all taxpayers to equal representation by all tax contributions. An appropriate rate structure should be a linear combination of the tax rates derived from the two limiting scenarios. Alternative egocentric voting schemes under equal representation by all taxpayers are also discussed. While these alternative schemes are politically more acceptable, measures need to be taken to counterbalance the confiscating nature desired by the majority of the voters. Such measures may marginalize the democratic voting process and produce rate structures less progressive than those assuming equal representation of tax contributions. Although the method discussed here allows flexibility on the marginal rate progressivity, it sets the high limit that the lowest and highest income classes ought to pay.

The Degree of Integrating Corporate and Capital Gains Tax into Income Tax and its Impact on Investment Decisions

We investigate the influence of different systems of current income and capital gain taxation on investors' decisions to either invest in corporate shares or to invest funds on the capital market. We analyze three basic tax systems. We show that even under certainty, we cannot derive general analytical solutions to the investment problem for different categories of tax regimes. Using a growth model, under restrictive assumptions we find that the shareholder relief system results in more severe distortions than does the full imputation system. In an attempt to prove this finding in a more realistic setting with uncertainty, we use Monte Carlo simulation for random rates of turn and random income tax rates. We find that tax-induced uncertainty and distortion is often higher under a shareholder relief system than under full imputation, but find opposite results for low income tax rates if either the retention rate is low or income tax rates are subject to high degrees of uncertainty. These results contradict the traditional view of full imputation and suggest that under uncertainty, full imputation may cause more severe distortions than would shareholder relief, especially if personal income tax rates are low and volatile. This result is important, because simulated low income tax rates correspond to empirical rates. Furthermore, the simulation clarifies the trade-off between opposing effects, i.e., tax and interest-rate effects, and the overwhelming impact of capital gains taxation. Apart from tax parameters, we identify the dividend rate and the point in time of selling the shares as important value drivers.

Political support and tax reforms with an application to Italy

In 2001 the Italian government introduced a personal income tax reform to be implemented in successive phases. In 2004 taxes were reduced to all income levels with higher gains for low-income and high-income individuals than for middle-income ones. A large debate arised. This paper explores the political economy reasons under this tax reform, mainly the attempt of the government to attract the uncertain voters (swing voters). A probabilistic voting model is introduced to capture the importance of swing voters. The model predicts that the average personal income tax rate tends to be lower for groups of lower income, higher preference for leisure and containing more politically mobile voters (swing voters). However, data from Italian polls show that, while the tax reform was a good strategy to attract swing voters, the specific design of the reform, which favored high-income and low-income individuals, but not the middle class, was not the more appropriate strategy.

Unified Social Tax Reform and Shadow Sector in Healthcare and Education

The paper studies the interdependence between unified social tax decrease and the evolution of shadow output and shadow prices in healthcare and education. The shadow economy is regarded as the combination of purely shadow activity as well as informal labor within official economy. The analysis shows that although in healthcare lowering of the unified social tax rate causes the decrease of shadow output, in education, on the contrary, the growth of shadow production is registered. If the decrease of unified social tax is accompanied by the rise in personal income tax rate, the economy faces considerable growth of shadow and market prices for educational and healthcare services.

Personal Taxes, Endogenous Default, and Corporate Bond Yield Spreads

Term structure models have often been criticized for failing to explain satisfactorily the yield spread between corporate and Treasury bonds. A potential problem is that the personal tax effect is ignored in these models. In this paper, we employ a structural model to investigate the role of personal taxes on both debt and equity returns in capital structure decisions and assess their impact on corporate bond yield spreads. It is shown that personal taxes affect the firm’s optimal capital structure, and the tax premium explains a substantial portion of yield spreads, especially for high-grade bonds. The predictive ability of the model for yield spreads is much improved when personal tax effects are accounted for. In controlling for the liquidity effect, we obtain implied personal income tax rates closely in line with Graham’s (1999) estimates.

The corporation as a tax shelter: Evidence from recent Israeli tax changes

Shifting of income between the corporate and the personal income tax bases in response to tax incentives is the premise of the literature on taxation and organizational form. Empirical evidence of income shifting is, however, merely circumstantial. Using a unique panel of high-frequency VAT data from Israel, we trace the footprints of income shifting through incorporation by high-income individuals who convert their labor income into less-taxed dividends. A rise in the personal income tax rates resulted in more than 4500 companies–a 5% addition to the corporate sector–being registered in the 12 months following the tax change, mainly by self-employed professionals in the industries of business activities and health services; behavioral response to taxation was found only in the top percentile of the income distribution.

Distributional and Welfare Implications of the Military Draft in Russia: Micro-level Evidence

In this paper data from a large nationally representative survey in Russia are used to analyze the distributional and welfare implications of the military draft. The authors focus on draft avoidance as a common response to highly unpopular conscription system ridden by corruption. A theoretical model that describes household compliance decisions with respect to enlistment is developed. Several econometric techniques are employed to estimate the effect of household characteristics on the probability to serve in the army and the draft-induced implications for household income. The results indicate that the burden of conscription falls excessively on the poor. Poor, low-educated, rural households are much more likely to have their sons enlisted compared to urban, wealthy and better-educated families. The losses incurred by the poor are disproportionately large and exceed the statutory rate of personal income tax.

Impact of Indonesian Commitments and Other Policy Options Under the WTO on the Marcroeconomy, Agriculture and Household Income

This paper attempted to carry out an analysis of the actual impact of Indonesia's commitments including other policy options under the WTO. Using a computable general equilibrium (CGE) model, the study analyzed three policy options involving tariff reduction as follows: (1) The government adopts the existing reduction in applied tariff on agricultural and non agricultural sectors, (2) The government adopts only 50% of the existing tariff reduction, and (3) The government goes to full liberalization by removing tariff in agricultural and non-agricultural sectors, that is, tariff is set at zero level. Results showed that the tariff reduction generally caused an increase in Gross Domestic Product (GDP) and aggregate output. However, some macroeconomic variables such as terms of trade, export price index, trade balance, and tariff revenues have been adversely affected. Likewise, output of some sectors in agriculture declined due to tariff reduction including the horticulture industry (fruits, vegetables), non-food agriculture (other crops), and beverage crops (rubber, sugarcane, coconut, oil palm, tobacco, coffee, tea, clove, fibre, and other estate crops). The tariff cut has also reduced the nominal household income. However, household consumption still increased due to lower prices following tariff reduction. Adoption of only 50% of the existing tariff reduction has less impact on the macroeconomy, agriculture and income of different household groups. In contrast, maintaining the present commitment on tariff reduction would have greater impact. The greatest impact would be when the government reduces applied tariff to zero on both sectors. This study suggests that the government should provide strong support to facilitate the development of the horticulture industry, non-food agriculture, and beverage crops sectors. Tariff reduction on these sectors should be undertaken gradually to minimize the social cost of adjustment. The government should provide compensation to household groups adversely affected by tariff reduction through either an increase in government transfers or a decrease in the personal income tax rate or both. Since these measures will affect the fiscal position of the country, the government should improve the competitiveness of agricultural export industries with high potentials for market expansion through the development of agricultural processing technology.

The Elasticity of Marginal Utility of Consumption: Estimates for 20 OECD Countries*

In social project appraisal, the policy profile of both distributional welfare weights and the social discount rate has risen considerably in recent years. This fact has important implications for the allocation of funds to social projects and policies in countries, and in unions of countries such as the EU. A key component in the formulae for both welfare weights and the social discount rate is the elasticity of marginal utility of consumption, e. A critical review of existing evidence on e suggests that the UK Treasury's preferred value of unity is too low. New evidence presented in this paper, based on the structure of personal income tax rates, suggests that, on average, for developed countries e is close to 1.4. This particular approach to the estimation of e has previously been under-utilised by researchers.

The Russian 'flat tax' reform

In 2001, Russia dramatically reduced its higher rates of personal income tax (PIT), establishing a single marginal rate at the low level of 13%. In the following year, real revenue from the PIT increased by about 26%. This ‘flat tax’ experience has attracted much attention (and emulation), making it perhaps the most important tax reform of recent years. But it has been little studied. This paper asks whether the strong performance of PIT revenue was itself a consequence of this reform, using both macro evidence and, in particular, micro level data on the experiences of individuals and households affected by the reform to varying degrees. It concludes that there is no evidence of a strong supply side effect of the reform. Compliance, however, does appear to have improved quite substantially – by about one third, according to our estimates – though it remains unclear whether this was due to the parametric tax reform or to accompanying changes in enforcement. — Anna Ivanova, Michael Keen and Alexander Klemm

The Impact of Personal Income Taxation on Executive Compensation

This paper analyzes the effect of personal income taxation on the sensitivity of executive compensation to company performance and the use of stock option and restricted stock grants underlying this sensitivity. The theoretical model predicts that, if a single tax rate applies to the entire compensation package, an increase in the tax rate weakly diminishes the equilibrium level of managerial effort and the after-tax pay-to-performance sensitivity, with the effect on the pre-tax pay-to-performance sensitivity being ambiguous. When salary and option gains are taxed at a higher rate than stock gains, tax changes also induce shifting among the individual compensation instruments. Interestingly, this differential taxation leads to a positive amount of stocks in the compensation contract even in the absence of any desire to incentivize the manager. In addition, an increase in the tax rate applied to salary and option gains may increase the level of managerial effort in equilibrium. On the other hand, an increase in the tax rate applied to stock gains weakly decreases the equilibrium level of managerial effort and strictly decreases the amount of after-tax pay-to-performance sensitivity generated by stock grants. The second part of the paper exploits the variation in the U.S. federal personal income tax rate generated by the Omnibus Budget Reconciliation Act of 1993, as well as variation in the combined federal and state income tax rates during the period 1992-1996 to empirically evaluate the impact of personal income taxation on the pay-to-stock-price sensitivity generated by stock-option and restricted stock grants. The results show that an increase in the ordinary income tax rate decreases the pay-to-stock-price sensitivity generated by option grants when time series variation in the marginal tax rate is utilized in the identification, with the estimates retaining the same sign but being statistically insignificant when only the variation in the marginal tax rate originating from cross-sectional variation in the federal income tax rate and/or state tax rate changes is used in the estimation. On the other hand, stock grant sensitivity is found to be unresponsive to changes in the ordinary income tax rate.

The Russian Flat Tax Reform

Russia dramatically reduced its higher rates of personal income tax (PIT) in 2001 establishing a single marginal rate at the low level of 13 percent. In the following year, real revenue from the PIT actually increased by about 26 percent. This 'flat tax' experience has attracted much attention (and emulation) among policymakers, making it perhaps the most important tax reform of recent years. But it has been little studied. This paper asks whether the strong revenue performance of the PIT was itself a consequence of this reform, using both macro evidence and, in particular, micro-level data on the experiences of individuals and households affected by the reform to varying degrees. It concludes that there is no evidence of a strong supply side effect of the reform. Compliance, however, did improve quite substantially-by about one third according to our estimates-though it remains unclear whether this was due to the parametric reforms or to accompanying changes in enforcement.

Corporate tax policy, foreign firm ownership and thin capitalization

This paper analyzes the implications of foreign firm ownership and international profit shifting through thin capitalization for corporate tax policy. We consider a model of interjurisdictional tax competition where the corporate tax serves as a backstop to the personal income tax, interest on debt is deductible from the corporate tax base and multinational firms may shift profit across countries through thin capitalization. We show that the problem of thin capitalization induces countries to reduce their corporate tax rates below the personal income tax rate and to broaden their tax bases. Moreover, foreign firm ownership leads to a reduction in corporate tax rates. We also show that there is scope for welfare enhancing tax coordination in our model. In the presence of both foreign firm ownership and thin capitalization, countries gain from a coordinated increase in corporate tax rates or from a coordinated broadening of the tax base.