Tax Brackets Research Articles

No progressive taxation without discrimination? On the generality of the law in the classical liberal tradition

Any liberal theory that would take seriously the question of equality before the law is bound to engage with discrimination-related matters, and so long as one is a liberal one should oppose all discrimination coming from the state. This, however, may be a double-edged sword since many classical liberals have quite readily opposed progressive taxation by invoking its discriminatory nature. Some liberals will therefore conclude that one cannot establish different tax brackets, lest taxation be illiberal. This paper endeavours to refute this assumption. Progression may be compatible with the classical liberal concern for the rule of law, provided legislative discretion on tax-related matters is duly limited by the principle of generality, as well as by a certain standard of reasonable lawmaking. Through a careful distinction between four concepts of differential treatment, this paper demonstrates that progressive tax arrangements do not necessarily discriminate against the well-off, and that it can efficiently fulfill some legitimate classical liberals objectives.

Dividend taxation and household dividend portfolio decisions: evidence from the U.S. Jobs and Growth Tax Relief Reconciliation Act of 2003

ABSTRACTThis study examines the dividend clientele hypothesis by focusing on the preferential tax treatment of qualified dividends provided by the 2003 Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) in the United States. Using the Public Use Tax File data, the author finds that the ratios of dividends to long-term capital gains before the 2003 tax act significantly declined with household tax rate differentials between dividends and long-term capital gains, but such a negative tax effect on the ratios disappears afterwards. This seemingly tax-inefficient composition of dividends and long-term capital gains after the tax act arises from households’ ability to reduce their tax burdens on stocks by exploiting the new preferential tax treatments on qualified dividends under JGTRRA. That is, households in the upper tax bracket hold significantly greater shares of qualified dividends relative to ordinary dividends after the tax act.

Do Employer Pension Contributions Reflect Employee Preferences? Evidence from a Retirement Savings Reform in Denmark

This paper studies how firms set contributions to employer provided 401(k)-type pension plans. Using a reform that decreased the subsidy to contributions to capital pension accounts for Danish workers in the top income tax bracket, we provide strong evidence that employers' contributions are based on their employees' savings preferences. We find an immediate decrease in employer contributions to capital accounts, whose magnitude increased in the share of employees directly affected by the reform. This response was large relative to average employee responses within private IRA-type plans and was accompanied by a similar magnitude shift of employer contributions to annuity accounts. (JEL D14, J26, J32)

Nature of transfers, income tax function and empirical estimation of elasticity of taxable income for Brazil

ABSTRACTThis article aims to estimate the elasticity of taxable income (ETI), taking into account the nature of transfers and their use as a redistribution package (involving cash and in-kind transfers) to households in Brazil. Our contributions are twofold. First, we provide a simple model with balanced-budget government that reveals the role played by cash and in-kind transfers on the labour supply (and income tax revenues thereof). Next, in order to estimate ETI in the presence of cash and in-kind transfers, Brazilian population surveys (Pesquisa Nacional por Amostra de Domicílios [PNAD]) are used to explore a limited tax reform that was implemented between 1997 and 1998. This reform only affected the higher income tax bracket. Our findings suggest that in-kind (cash) transfers are positively (negatively) associated with reported taxable income and precise estimation of ETI requires estimates of both types of transfers. Last, we estimate the ETI for Brazil in the range from 0.4 to 1.3 not different from those that maximize income tax revenues.

The new political economy of taxation in the developing world

ABSTRACTConcomitant with globalization, neoliberal tax reforms have spread across the globe since the early 1980s. In many countries, statutory rates, the number of tax brackets, and the incidence of tax allowances have been reduced for income taxes; in the developing world, international liberalization has also been associated with reduced revenues from trade taxes and increased pressures for expansion of the value added tax and income tax revenue intake. Yet, competition for mobile assets and new opportunities for tax avoidance potentially constrains taxation of corporate and personal income. Thus, contemporary conditions create especially severe challenges for the pursuit of greater income equality and enhanced public goods provision in developing nations. The present paper situates this special issue's contributions within the theoretical and empirical literatures that seek to explain contemporary changes in taxation. I argue that we know quite a lot about the tax effects of globalization, domestic politics, and their interaction in rich democracies; we know much less about how international forces and domestic factors influence tax reforms in the developing world. In this context, I highlight how each paper in this volume contributes to our understanding of the impacts of globalization and domestic politics on tax policy choices and, in turn, the challenges and opportunities for revenue mobilization in developing nations.

Who benefits from the preferential treatment of business property under the German inheritance tax?

This paper contributes to the recent debate on the tax privilege for business property introduced by the German Inheritance Tax Act of 2009. We shed light on the tax effects of the preferential treatment based on micro-level data of realized business transfers from the German Inheritance Tax Statistic. As the tax exemptions are tied to employment expenses of the transferred business, we combine information from the tax statistic with a simulation of future employment expenses. We then compare the effective tax rates under a preferential treatment to the ones under a non-preferential treatment alternative. Results show that a large portion of business successions is untaxed under the current German inheritance tax law and that average effective tax rates approach zero. Moreover, the preferential treatment levels the differences between the effective taxation of small and large transfers and leads to an almost equal effective tax rate across all tax brackets. We also demonstrate that tax reductions are considerably larger in times of economic growth where the requirements for a preferential treatment are more likely to be met.

Progressive Income Tax and Risky Personal Income: A Real Options Perspective

Progressive income taxation regimes can be modelled as a weighted portfolio of European Call options over an individual's gross taxable income. These options are struck at the tax bracket lower bound and weighted by the increment in the marginal tax rate. The government holds a long position in this 'taxation option', with the individual taxpayer holding a short position. Consistent with general option pricing, the present value of the government's claim on a taxpayer's income is larger for those whose taxable income is riskier. Unlike most holders of Call option contracts, the government has the ability to alter one of the fundamental inputs into the option price, that of the risk-free rate of return. I note the sensitivities of these claims to changes in the risk-free rate of return. When aiming to maintain the option's value, the government's risk-free rate sensitivity coincides with that of the taxpayer in the case of a volatility shock. In the case of an income shock, the government's interests generally conflict with taxpayers, especially those with lower taxable incomes.

The Sugar Levy: A Briefing

In March 2016, George Osborne announced a ‘sugar levy’ on soft drink companies to start in April 2018. Under this policy, companies will be taxed on sales of medium and high sugar drinks (excluding fruit juice and milk-based drinks). As an anti-obesity policy, the sugar levy seems arbitrary. Consumption of both sugar and sugary drinks has been falling for years while obesity has been rising. Soft drinks make only a small contribution to average calorie intake. Comparisons between European countries show no correlation between sugary drink consumption and obesity. The Office for Budget Responsibility says the levy will increase inflation by 0.25% in 2018-19 thereby adding £1 billion to accrued interest payments on index-linked gilts. The inflationary effect will raise the cost of index-linked salaries, pensions and benefits by many millions of pounds. The levy will also require additional funding for enforcement and administration. The sugar levy will be loss-making and will give companies the perverse incentive to raise sugar levels up to the threshold of each tax bracket.

A Tax-Benefit Model for Austria (AUTAX): Work Incentives and Distributional Effects of the 2016 Tax Reform

This study introduces a tax-benefit model based on administrative data for Austria (AUTAX) that can be used for theex ante and ex post evaluation of reforms of personal income taxation and social benefits. We analyze the effects of the 2016 Austrian tax reform ex anteand concentrate on the effects on the distribution of net income and on work incentives. Our results show that the changes to the tax brackets have slightly increased inequality, and the middle- and high-income earners profited most. This effect has been significantly lowered by an increase in the negative income tax for low-income earners. By calculating average effective tax rates (AETRs) as well as marginal effective tax rates (METRs) along the whole income distribution in our model, we discuss changes on work incentives on the extensive but also on the intensive margin. We show that the 2016 tax reform positively affected the work incentives on the extensive and the intensive margin for higher income groups. The additional change in the negative income tax had only an impact on the extensive margin of low-income earners. These low-income earners are usually part-time workers, therefore giving a higher incentive to work part-time but no additional incentive to increase working hours. We show that a decrease in social security contributions instead of an increase in the negative income tax for low-income earners would lead to an increase in both the extensive and the intensive margin.

Rental housing for a French taxpayer: are there tax arbitrage opportunities in the USA?

ABSTRACTThe aim of this paper is to identify tax arbitrage opportunities in the field of rental housing in France and the USA. We conducted tax simulations for investments made in the USA or France. We compared total net rental incomes, capital gains and present investment values based on different tax regimes. Our results show that rental housing in the USA under the Effectively Connected Income classification serves as the best option, as it generates the highest present investment value. We performed several robustness exercises and we showed that our results are strengthened in cases of stronger price appreciation in the USA than in France and in cases of high landlord tax brackets.

DO EMPLOYER PENSION CONTRIBUTIONS REFLECT EMPLOYEE PREFERENCES? EVIDENCE FROM A RETIREMENT SAVINGS REFORM IN DENMARK.

This paper studies how firms set contributions to employer-provided 401(k)-type pension plans. Using a reform that decreased the subsidy to contributions to capital pension accounts for Danish workers in the top income tax bracket, we provide strong evidence that employers' contributions are based on their employees' savings preferences. We find an immediate decrease in employer contributions to capital accounts, whose magnitude increased in the share of employees directly affected by the reform. This response was large relative to average employee responses within private IRA-type plans and was accompanied by a similar-magnitude shift of employer contributions to annuity accounts.

Tax Reform 2015/2016

This note outlines the details of Austria’s recent tax reform, which includes significant changes to, inter alia, the tax brackets, employee benefit exemptions and deductions, depreciation rates for immovable property, loss utilization limitations, the taxation of shareholder contribution repayments and the capital gains tax rate. In addition, the reform includes a preferential tax regime for incoming scientists and researchers, certain measures against tax fraud and a reform of real estate transfer taxes.

Distributional and welfare effects of Germany’s year 2000 tax reform: the context of savings and portfolio choice

This paper empirically investigates distributional and welfare effects of Germany’s year 2000 tax reform in the context of the household savings decision and the allocation of wealth to a portfolio of assets. The reform is simulated in an ex ante behavioural microsimulation approach. Behavioural responses resulting from changes in capital income taxation are estimated in an empirical demand model for household savings and asset allocation, which is applied to German survey data. Significant reductions in tax rates result in income gains for most of the households. Gains are found to be greater for households in higher tax brackets, whereby income inequality increases, in particular in East Germany. Moreover, households increase savings and alter the structure of asset demand as a result of shifts in relative asset prices. As a result, utility losses reduce welfare effects for almost all households, in particular for households with greater savings.

The Agency Exception to the Anticipatory Assignment of Income Doctrine

One consequence of having graduated income tax rates is that it becomes advantageous to shift income from a high bracket taxpayer to a person in a lower tax bracket. A number of different vehicles have been tried to shift the incidence of the income tax to another person, and the courts and Congress have adopted a number of rules to prevent that from occurring. As early as 1930, the Supreme Court adopted the anticipatory assignment of income doctrine to prevent a person who anticipates earning income from his services from shifting that income to another person in a lower tax bracket. Income is taxed to the person whose services produced it rather than to the person who has the beneficial right to possess the income once it is earned. This article discusses the tax treatment of an employee whose services create income for his employer. The anticipatory assignment of income doctrine does not apply in these circumstances under the so-called agency exception. This article explains the policy justification of the agency exception and uses examples to help illustrate when and when not the agency exception should apply.

Societal costs after renal cancer surgery.

512 Background: The hospital costs of radical or partial nephrectomy for treatment of confirmed or suspected renal cell carcinoma have been well described. We sought to estimate a previously unreported societal cost of renal cancer surgery by assessing surgery-related time off work (TOW) taken by patients and their caretakers. Methods: To a cohort of 315 subjects enrolled in an IRB-approved prospective renal quality-of-life study who underwent radical or partial nephrectomy at our institution, we administered an occupational survey asking subjects to recall employment status, physical demands at work (sedentary, moderate activity, heavy lifting), income by tax bracket, surgery-related TOW (in days), and caretaker assistance. We excluded subjects who underwent cytoreductive nephrectomy. We estimated potential wages lost using individual income and TOW, and used logistic regression to assess for factors predictive of TOW > 30 days. Results: Of the 108 subjects who responded to the survey, 69 were employed at time of surgery. 4 subjects did not return to work after surgery, all of whom were older than 65. 12 subjects were excluded per the above-described criteria, leaving 53 subjects with complete occupational information. Mean (SD) age was 54. The majority (54%) of subjects had sedentary jobs. Subjects’ time off work ranged from 14 to 88 days; mean (SD) and median (IQR) TOW was 38 (17) and 34 (26-45) days, respectively. Mean potential wages lost for TOW was $10,371 (SD=$7,966). 23 (43%) subjects had at least one caretaker take TOW (mean/median caretaker TOW: 10/5 days, respectively) to assist in post-operative recovery. On univariate and multivariable analysis, age, work physicality, type of surgery (radical vs partial nephrectomy), surgical approach (minimally invasive vs open), income bracket, post-operative complications, or caretaker assistance were not significantly associated with taking > 30 days off from work. Conclusions: Despite advances in minimally invasive surgery, most patients take over one month off from work after renal cancer surgery. Incorporating these societal costs may allow for more comprehensive cost-effectiveness analyses in renal cancer care. Future directions include assessing TOW prospectively in a larger, more diverse cohort.

Design Characteristics and Tobacco Metal Concentrations in Filtered Cigars.

While U.S. cigarette consumption has declined, cigar use has steadily increased, for reasons including price compared to cigarettes and the availability of filtered varieties resembling cigarettes, and flavors that have been banned in cigarettes (excluding menthol). Little published data exists on the design characteristics of such cigars. A variety of filtered cigar brands were tested for design characteristics such as whole cigar weight, ventilation, and per-cigar tobacco weight. Cigar sticks were then sent to the University of St. Andrews for metal concentration testing of As, Pb, Cr, Ni, and Cd. Large and small cigars were statistically different between cigar weight (p ≤ .001), per-cigar tobacco weight (p = .001), rod diameter (p = .006), and filter diameter (p = .012). The differences in mean ventilation (overall mean = 19.6%, min. = 0.84%, max. = 57.6%) across filtered cigar brands were found to be statistically significant (p = .031), and can be compared to the ventilation of the average of 2013 U.S. Marlboro Red, Gold, and Silver packs at 29% ventilation. There were no significant differences for metal concentrations between cigar types (p = .650), with Pb and As levels being similar to U.S. 2009 cigarette concentrations, Cd cigar levels being slightly higher, and Cr and Ni levels much lower than cigarette levels. With cigar use rising, and filtered cigars displaying substantial similarities to filtered cigarettes, more research on product characteristics is warranted. Future plans include testing tobacco alkaloid and more observation of cigar weight for tax bracket purposes.

Perspectives of tax reforms in Croatia: expert opinion survey

In order to shape tax reform it is necessary objectively to assess the current stateof-the- art of and of the outlook for the tax system. After having reviewed all previous reforms in the light of the consumption-based (interest- adjusted) concept of direct taxation, which was almost systematically implemented in Croatia in 1994, we present the results of a broad expert opinion survey about the Croatian tax system. The most interesting results suggest the maintenance/(re)introduction of different tax incentives and reduced VAT rates, rejection of a flat tax as well as decrease of tax brackets, an increase in alcohol and tobacco duties, the introduction of a financial activities tax, a further shift from income to consumption, a decrease of the tax share in GDP and a belief in the behavioral responsiveness of tax decreases/exemptions, as well as a firm commitment to the principle of equity. The last three economic views/values are important predictors of other tax attitudes.

How Do Employment Tax Credits Work? - an Analysis of the German Inheritance Tax -

This paper contributes to the recent debate on the tax privilege for business property introduced by the German Inheritance Tax Act of 2009. We shed light on the tax effects of the preferential treatment based on micro-level data of realized business transfers from the German Inheritance Tax Statistic. As the tax exemptions are tied to employment expenses of the transferred business, we combine information from the tax statistic with a simulation of future employment expenses. We then compare the effective tax rates under a preferential treatment to the ones under a non-preferential treatment alternative. Results show that a large portion of business successions is untaxed under the current German inheritance tax law and that average effective tax rates approach zero. Moreover, the preferential treatment levels the differences between the effective taxation of small and large transfers and leads to an almost equal effective tax rate across all tax brackets. We also demonstrate that tax reductions are considerably larger in times of economic growth where the requirements for a preferential treatment are more likely to be met.

Der Weg ist frei: mehr Steuergerechtigkeit durch nachhaltigen Abbau der kalten Progression

Der Abbau der kalten Progression wird aktuell wieder diskutiert. An einigen Eckwerten des Einkommensteuertarifs lasst sich zeigen, dass die tatsachliche Entwicklung deutlich von den zum Ausgleich der Inflation erforderlichen Tarifanderungen abweicht. Die Autoren berechnen die Mindereinnahmen bei Einfuhrung eines Tarifs auf Radern und bei Anhebung des Grundfreibetrags. In einer Verteilungsanalyse zeigen sie, dass die Entlastungseffekte hoch sind — absolut fur hohe Einkommen, relativ fur niedrige Einkommen.

Rate of Return on Single Family Housing Investments in the U.S. 1970-2000

Investors owned 15 percent of all single family houses in the U.S. in the year 2000, with a value of fixed assets that dwarfed that of any single manufacturing industry, and approached that of the entire manufacturing sector. Owner occupied and investor owned houses are functionally identical and in the same market, but investors are subject to substantially higher taxes on the ownership of their houses. As change and adjustments occur to bring the single family housing market into equilibrium, the rate of price appreciation that leaves owner occupiers in equilibrium will have investors taking losses and exiting the market, without some compensating differential.The results reported here for the period 1970-2000 support the proposition that the rates of return received by owner occupiers and investors are the same in equilibrium and just equal to the risk adjusted opportunity return. Notwithstanding the adverse tax treatment, investor returns can equal owner occupier returns in the presence of two conditions. First, if investors are in a higher tax bracket than owner occupiers, this raises their tax subsidy since losses on housing investments offset other income, thereby lowering total tax obligations. This reduction in after tax costs is more pronounced when borrowed funds are involved. Second, investors are in a better position than owner occupiers to enter or exit the market as profit opportunities present themselves. If investors can raise the rate of house price appreciation they experience, relative to owner occupiers, by just a fraction of a point, this is enough to bring investors returns into alignment with those of owner occupiers and also with opportunity cost.