Tax Setting Research Articles

The effects of agglomeration on tax competition: evidence from a two-regime spatial panel model on French data

This article studies how agglomeration economies affect tax competition between local jurisdictions. We develop a theoretical model with two main testable predictions: in a setting where agglomeration forces lessen the responsiveness of capital to tax, high-regime agglomeration jurisdictions should adopt a rent-taxing behavior, and they should react less to their neighbors’ tax policies. The panel dataset spans the period from 1995 to 2007 and focuses on the local business taxes set at the French mid-subnational jurisdiction level of departements. First, instrumental variables estimates indicate that attractive jurisdictions capture a significant part of firms’ agglomeration rent by levying higher tax rates. An increase by 1% of the localization economies indicator (a specialization index) leads to increasing the business tax rate by 0.43%. Second, local tax setting behaviors are characterized by a mimetic behavior, with best response functions that slope upwards. We propose a two-agglomeration-regime spatial lag model to estimate through ML the relationship between tax competition and attractiveness. Our main result shows that both are linked and tax mimicry is less pronounced if a jurisdiction is agglomerated. Specifically, in response to a decrease in the tax rate of neighboring local governments by 1%, local governments with strong agglomeration economies reduce their tax rate by 0.4% against 0.6% for local government characterized by a low-agglomeration regime. We show that the classical one-size-fits-all-case of a single regime of agglomeration suffers from a 40% downward bias for low-agglomeration jurisdictions. We draw the link to policy praxis by discussing the optimal design of equalization schemes.

Who Killed Obamacare?

Why did the ACA fail to win over a constituency commensurate with the impressive transformation it made in American healthcare provision? The very progressiveness of the ACA worked against it. Back in 2010 the ACA did something quite extraordinary. To pay for the exchange subsidies and Medicaid expansion, the new law imposed a set of progressive taxes that represented the most consequential redistribution of income, from the top to the bottom, that Americans had seen since the Second World War. The revenue raised by those taxes helped pay for a dramatic expansion and improvement of Medicaid. But none of this made Obamacare a popular program in most of those red, rural, and white counties where the program had such a large impact.

Fiscal Competition Among Local Governments after Fiscal Decentralization

Spatial interaction among local governments in fiscal setting decisions is receiving increasingly attention in the applied public economics literature. Spatial interaction models rely on the presence of an externality from local budget making, that is external effects originate from inter-jurisdictional resource flows due to tax competition for a mobile base, or from local public expenditure spillovers into neighboring jurisdictions. Similarly, the intergovernmental grants competition exists when there is a rivalry among local governments to get them from central government. This paper attempted to identify how great the fiscal competition among local governments in Indonesia. Using spatial statistics, we concluded that the fiscal competition among municipalities was greater compared to the pre fiscal decentralization period. It seems that the local tax setting and expenditures decisions in particular municipality can be attributed to the mimicking behavior to neighbor regions. Also, we found that the fiscal competition among municipalities could be attributed negatively to the fiscal disparity. Those imply that in the regional autonomy era the local governments tend to increase their local own revenue intensively and demand for intergovernmental grants in order to finance their expenditures. In the long run, they could lead to the high cost economy, worsening fiscal dependency, and inefficiency of local government expenditures. Those findings above suggest that the distribution of intergovernmental transfers among regions should consider the local tax effort and the services minimum standard plays an important role to achieve the efficiency of local government expenditures.

Do Mandatory Risk Factor Disclosures Predict Future Cash Flows and Stock Returns? Evidence from Tax Risk Factor Disclosures

Prior research finds that mandatory risk factor disclosures are informative to investors in that they increase their assessments of firm risk (Kravet and Muslu 2013; Campbell et al. 2014; Hope et al. 2016). However, the literature is silent as to whether these disclosures provide information about future cash flows and, ultimately, their implications for firm value. We address this question by examining the association between Form 10-K risk factor disclosures and future cash flows and stock returns. We use the setting of taxes because it is easy to identify the specific income and cash flow statement line items to which these risks relate. We offer two main results. First, we find that tax risk factor disclosures are positively associated with future cash flows. This finding suggests that, on average, managers are taking healthy levels of risk, as risky tax positions are rewarded with future tax savings. Second, we find that investors do not fully incorporate this relation into stock prices at the time of the risk factor disclosure. Instead, investors do not fully impound this information into stock prices until the implications of risk factor disclosures on future cash flows are more saliently disclosed the following year. Overall, our results suggest that risk factor disclosures not only provide information about the risk of the firm, but also provide information about future cash flows of the firm. On average, the outcomes from these risks taken by managers are value increasing, and investors do not fully incorporate this relation into stock prices.

Excise Tax Setting in a Dynamic Space-time Framework

This study develops a simple model for analyzing excise tax setting in a competitive framework. Specifically, the model predicts that tax rate competition will vary for different goods based on the relative ease of cross-border shopping. To test the model, this study utilizes a dynamic space-time panel econometric model to quantify the horizontal response function for cigarette, beer, and gasoline tax rates for US states from 1960 to 2007. The empirical findings support the model predictions. Only cigarette tax rates have a horizontal response function statistically different from zero.

Tax competition and federal equalization schemes with decentralized leadership

Regional governments compete by setting capital taxes in anticipation of the central government’s fiscal equalization and income redistribution policies. I start by demonstrating that the constrained socially optimal allocation satisfies the Pareto efficient conditions; therefore, it may be first best. It is also shown that the subgame perfect equilibrium for the game played by regional and central governments is socially optimal. The anticipation of equalization of marginal utilities of public consumption and equalization of marginal utilities of private consumption provides regional governments with correct incentives in the setting of capital taxes, preventing the phenomenon known as “race to the bottom.”

Electoral Cycle and Tax Policy – Determination of Income Tax Variables: Case of the Czech Republic

The paper deals with the issue of the relationship between results of examination of the influence of political business cycle on the basis of the choice of input variables. There were used nominal and effective tax rates, total tax liability, total tax collection in case of individual income tax setting in the Czech Republic in the time period 1993−2014. The results of analysis of the effects the electoral cycle on the tax policy determination may differ in relation to the specification of input data and the choice of dependent variables.

Corporate taxes with unobservable profits

Using a two-period tax-signalling model, a study is performed on the behaviour of a revenue-raising government in setting profit-based corporate taxes for a company with private information on its potential profitability. In a separating equilibrium in which both the high- and low-profit company produce a positive amount in period 1 (separating equilibrium S2), the tax set for that period is lower than that of the symmetric information, resulting in informational rent to the high-profit company in that period, but not in period 2. As result, taxes increase with time. In a separating equilibrium in which only the high-profit company produces (separating equilibrium S1 or shut-down equilibrium), no informational rent goes to the high-profit company in either period, but at the cost that the low-profit firm exits the market. Finally, in a pooling equilibrium, taxes are time-invariant and charged in such a way that period-1 informational rent to the high-profit company is lower than in S2, but persists in period 2. Consequently, the government can maximize tax revenue by not forcing information disclosure. The impact of government behaviour on welfare is also examined.

Fiscal Competition and Public Debt

The existing theoretical literature on fiscal competition has to a large extent ignored the role of government debt as a determinant of taxes and productive public spending. We develop a simple model of fiscal competition with government borrowing. If a default on government debt is no option, initial debt levels play no role in fiscal competition. This neutrality result is overturned when a default is possible. A government that is constrained in its borrowing due to a possible default responds optimally by lowering spending on durable public infrastructure, which in turn induces more aggressive tax setting. A rise in exogenous firm mobility reinforces the link between legacy debt and fiscal competition. Our model may help explain the observation that highly indebted countries in Europe have decreased corporate tax rates over-proportionally. Our model may also be useful for evaluating decentralization reforms in which the power to tax firms is devolved to lower levels of governments which differ in their initial debt levels.

Stirring Up a Hornets' Nest: Geographic Distribution of Crime

This paper develops a model of the geographic distribution of crime in an urban area. Agents select their occupation, residence, consumption, and housing. The paper is the first to formally study how the location of crime, the residence of workers, and housing prices are affected by the spatial allocation of police protection. It examines two opposite strategies of police deployment: concentrated protection (the police only protect one area of the city) and dispersed protection (the police are evenly deployed across the city). In equilibrium, under concentrated protection, only rich agents are willing to pay the high housing prices in protected areas, while poor agents reside in high-crime areas. The city becomes segregated. Under dispersed protection, all areas of the city have the same income per capita and crime levels, and an integrated city emerges. Comparing these equilibria, crime is more likely to be higher under dispersed protection than concentrated protection when inequality is high, dispersing the police force significantly reduces its effectiveness, and the proportion of income that criminals extract from rich (poor) agents is high (low). Concentrated protection may induce higher aggregate welfare than dispersed protection, particularly when inequality is high. Unequal societies face a difficult dilemma in that concentrated protection maximizes aggregate welfare but exacerbates social disparities. Fortunately, there is a set of taxes and subsidies that can be employed to offset the disadvantages to agents left unprotected. Finally, this paper incorporates private security and shows that dispersed public protection does not necessarily lead to an integrated city equilibrium. Rich agents may use private security to endogenously isolate themselves in closed residential areas.

Fiscal Competition and Public Debt

The existing theoretical literature on fiscal competition has to a large extent ignored the role of government debt as a determinant of taxes and productive public spending. We develop a simple model of fiscal competition with government borrowing. If a default on government debt is no option, initial debt levels play no role in fiscal competition. This neutrality result is overturned when a default is possible. A government that is constrained in its borrowing due to a possible default responds optimally by lowering spending on durable public infrastructure, which in turn induces more aggressive tax setting. A rise in exogenous firm mobility reinforces the link between legacy debt and fiscal competition. Our model may help explain the observation that highly indebted countries in Europe have decreased corporate tax rates over-proportionally. Our model may also be useful for evaluating decentralization reforms in which the power to tax firms is devolved to lower levels of governments which differ in their initial debt levels.

Optimal commodity taxation with varying quality of goods

A standard result in the optimal taxation literature is that when agents differ in market ability and the government aims at redistributing from high- to low-skilled agents by means of an optimal nonlinear labor income tax and a set of commodity taxes, an optimally designed commodity tax structure should encourage (discourage) the consumption of goods/services that are complement with labor (leisure). In this paper we highlight that when agents can choose both the quality and the quantity of a given good/service, this standard commodity tax result needs to be qualified. First, we show that it becomes relevant to distinguish between specific and ad valorem taxes/subsidies. Second, whether the standard result holds or not depends on how the concept of labor (leisure) complement is defined, namely, whether it is defined in terms of number of units or in terms of expenditure. We also show that levying specific and ad valorem taxes at opposite signs on a given good can be a feature of the second-best optimum.

Controlling Episodic Air Pollution with a Seasonal Gas Tax: The Case of Cache Valley, Utah

Using daily data spanning 10 years, we establish a statistical relationship between episodic particulate-matter \((\hbox {PM}_{2.5})\) concentrations and vehicle trips in Cache Valley, Utah, and estimate an average gas-price elasticity for the region. We also estimate the benefits and costs associated with a seasonal gas tax set to reduce vehicle trips during the winter-inversion season and thereby lower health costs through concomitant decreases in the \(\hbox {PM}_{2.5}\) concentrations. We find a strong positive relationship between vehicle trips reduced and associated reductions in \(\hbox {PM}_{2.5}\) concentrations. Further, we estimate a mean gas price elasticity of approximately \(-\)0.3 in what we call a “high price variability environment.” Incorporating these results, cost-benefit analysis suggests that the social net benefit for Cache Valley associated with the imposition of a seasonal gas tax during the winter-inversion season is highly dependent upon the type of benefit estimation method used.

Compensation in the Post‐FIN 48 Period: The Case of Contracting on Tax Performance and Uncertainty

AbstractAcademic and anecdotal evidence indicates that incentive systems often provide short‐term payouts without regard for long‐term consequences. New detailed disclosures mandated by FIN No. 48, Accounting for Uncertainty in Income Taxes, enable us to use a tax setting to investigate whether boards adjust performance‐based pay for uncertainty. We find managers’ bonus payouts are positively associated with tax performance; however, bonus payouts are lower when measures of ex ante tax uncertainty are higher. Our results are robust to tests of alternative explanations including financial reporting aggressiveness, overall firm risk, and other forms of compensation. Further, we document that the relation between bonus compensation and tax performance has changed in the post‐FIN No. 48 period. Specifically, we identify a significant association between bonus payout and GAAP ETR only in the pre‐FIN No. 48 period and a significant association between bonus payout and cash ETR only in the post‐FIN No. 48 period, suggesting that the relation between compensation and tax avoidance should be examined carefully with particular attention to the post‐FIN No. 48 period.

The Affordable Care Act versus Medicare for All.

Many problems facing the Affordable Care Act would disappear if the nation were instead implementing Medicare for All - the extension of Medicare to every age group. Every American would be automatically covered for life. Premiums would be replaced with a set of Medicare taxes. There would be no patient cost sharing. Individuals would have free choice of doctors. Medicare's single-payer bargaining power would slow price increases and reduce medical cost as a percentage of gross domestic product (GDP). Taxes as a percentage of GDP would rise from below average to average for economically advanced nations. Medicare for All would be phased in by age.

Excise Tax Setting in a Dynamic Space-Time Framework

This study develops a simple model for analyzing excise tax setting in a competitive framework. Then, this study utilizes a dynamic space-time panel econometric model to explore cigarette and beer tax rate setting from U.S. states from 1960-2007. The empirical findings support the model predictions. Both cigarette and beer taxes are highly persistent, but cigarette tax rates are more competitive (spatially correlated) across states.

The economics of space debris: Estimating the costs and benefits of debris mitigation

This paper models and quantifies the externalities from space debris. We develop an analytical model that includes debris collisional breakup and new generation of mission-related and fragmentation-related debris. We then derive empirically tractable formulas for several hypothetical policy interventions including (i) an optimized set of launch taxes, and various ex ante and ex post rebates, to promote debris mitigation; (ii) technology standards imposed under voluntary or mandatory regulatory approaches; and (iii) optimal penalties for debris generation that might be imposed ex post under a liability system. The formulas are implemented following an extensive estimation of parameter values compiled from debris generation models, engineering analyses of mitigation/adaptation technologies, productivity losses from collision risk, and spacecraft fleet projections. An analytical, empirically tractable model, with two time periods representing (in our case) time blocs up to and after 2030, and where variables are averaged over the time bloc provides considerable insight on the costs and benefits of space debris management in the near and medium term

A teaching note on the tax benefits of retirement savings

Abstract Typical textbook treatments of tax-advantaged retirement savings plans focus on legalistic characteristics such as contribution limits and early withdrawal penalties. Popular press articles on these plans often present a myriad of details on the effects of inflation, rates of return, expected tax rates, ordinary income versus capital gains treatment, and other items that tend to obscure their fundamental tax advantages. The goal of this teaching note is to expose the fundamental tax advantages of retirement savings plans by conducting an analysis of a simplified tax setting. We identify four interrelated benefits of existing retirement plans – tax-deferred contributions, tax-deferred earnings, never-taxed earnings, and income smoothing with progressive tax rates. We also provide a more in-depth analysis of the choice between the two most popular forms of retirement savings, traditional and Roth accounts. An understanding of the properties of the tax benefits of retirement savings can be useful for students who are preparing for careers as tax professionals, as well as individuals who wish to understand the financial planning advice they receive.

In Praise of Frank Ramsey's Contribution to the Theory of Taxation

Frank Ramsey's classic paper A contribution to the theory of gave rise to the modern theory of optimal taxation. This paper traces the literature that grew out of Ramsey's 1927 paper and assesses which of its key insights has proven robust. Though the path breaking work of Peter Diamond and James Mirrlees showed that Ramsey's results could be generalized in some important ways, other work showed that the domain of applicability of Ramsey's original insights may be more limited: changes in assumptions about the set of feasible taxes (not allowing certain taxes, or allowing a progressive income tax or non-linear commodity taxes), and in particular about the taxation of pure rents, incorporating more explicitly distributional considerations, and/or recognizing the important ways in which our economy differs from the competitive model underlying Ramsey's analysis all change the optimal structure of commodity taxation in important ways.

The Omnipresence of Subchapter K in the International Arena?

The purpose of Subchapter K is to provide certainty as to the appropriate focal point for making tax determinations, i.e., at the partner level or the partnership level, dictating which level is determinative for what purpose. Subchapter K generally ensures that partners are ultimately taxed similarly under the three possible methods of realization upon their investment. Whether (1) the partnership run its course and disposed of its assets for cash and liquidated thereafter, (2) the partner sells his partnership interest to another for cash, or (3) the partnership liquidates by distributing its assets to the partner for sale thereafter, the amount and character of the gain or loss is generally the same, albeit with some deferral in the liquidation context. Regardless of the method chosen, tax consequences ensue. Subchapter N’s treatment of inbound and outbound activity reflects different overriding purposes. Regarding inbound activity, the goal is to ensure that foreign persons are subject to tax on income, whether investment or business oriented, derived with a nexus to the United States. Regarding outbound activity, the focus is on the avoidance of double taxation by United States persons on income earned abroad as well as limiting the deferral of income by United States persons investing abroad through foreign corporations.The difficulty arises when partnerships operate internationally, i.e., where Subchapter K and Subchapter N may potentially overlap. Does Subchapter K always control; does Subchapter N? Is the entity approach determinative, the aggregate, or either depending upon the context? What is the ideal model for resolving such issues? Subchapter K is frequently viewed as omnipresent; however, not all issues involving partnerships in an international tax setting should be governed by it. In fact, most can, and should, be resolved under the statutory regime and governing principles of Subchapter N. In those infrequent cases where Subchapter K has a role to play, the recognition of its structural integrity, employing both the aggregate and the entity methods, requires the application of either method, depending upon the context in which the issue arises. In essence, such a transaction should receive treatment similar to that which would be accorded to such a transaction if it were exclusively domestic.