Tax Brackets Research Articles

Minimizing Taxes: Keeping it All in the Family

Households can reduce taxes by transferring taxable income generating assets from high income family members to those in lower tax brackets. Parents, for instance, may exploit differences in the marginal tax rates that they face and those that apply to their children. But under progressive taxation, the marginal tax rates may converge upon transferring large sums from high to low income members as the income of the recipient is pushed into higher tax brackets, thereby limiting the tax arbitrage benefits of intergenerational transfers. As an alternative, and under a more effective form of income splitting, high income family members may create trusts for the benefit of other family members, and divide the transferred assets among a large number of trusts so as to subject the income from each trust to the lowest possible tax bracket. The Tax Reform Act of 1986 modified the treatment of trusts such that the maximum individual tax rate became applicable at very low levels of trust taxable income thereby erasing much of the benefits of transferring income through this vehicle. This paper provides an overview of the tax treatment of income received by individuals and that of trusts, and provides evidence on how changes in differential tax rates introduced in 1986 altered the use of trusts as means to splitting income and sheltering it from taxation.

A Snapshot of the Australian Taxpayer

AbstractUsing the most recent Australian Taxation Office published data, along with other sources of data, we provide detailed descriptive evidence on the income, deductions and other items (including superannuation) of the individual taxpayer in Australia. We provide these details across tax bracket, occupation, gender and location. In addition, we explore who is accessing negative gearing and by how much, thus contributing to the ongoing debate that surrounds this area of tax law. We show that individuals with a higher taxable income are more likely to access negative gearing, and we provide estimates of how the removal of this deduction would affect federal tax revenue. We discuss other reported areas such as deductions for gifts and donations, as well as providing a discussion on the use and potential use of the government‐provided pre‐filled tax information for individuals. Overall, this study is of interest to academics, government and tax practitioners alike.

Progresja podatkowa a Indeks Wzrostu i Rozwoju (GDI)

The main purpose of this article is to present a correlation relationship of the average tax rate, the amount of tax brackets and the so-called economic “growth & development index” (GDI) in the “high taxed” and “low taxed” European countries. The hypothesis is as follows: the more number of tax brackets in income progressive tax, the lower the GDI. Research methods used in the study are: unity-based normalization and Spearman’s rank correlation analysis. Spearman’s correlation between the average tax rate in “low tax rate” countries and GDI was negative and very strong, which means that as the average tax rate increases, the GDI decreases. That correlation was statistically significant. The correlation between the number of tax brackets and the GDI was examined only for the group of countries with the highest average tax rate as the second group of EU countries are progressive-free and was positive and strong, that is, with the increase in the number of tax brackets, the value of GDI increases. But by normal standards, the association between the two variables would not be considered statistically significant. Therefore, the hypothesis has been rejected. The subject of study requires further analysis.

Taxing the Virtual Economy: Tax Implications of E-Commerce in Uganda

Information technology advancements have been challenging many traditional concepts and approaches and tax authorities have been faced with a problematic, or rather challenging scenario because of the development of electronic commerce. E-commerce presents a radical transformation of the nature of commercial activities, creating significant challenges to regulations and tax formulas that are not specifically directed towards the “virtual” commercial world. The design of tax policies in the face of e-commerce is now a tall order. Like in many developing and even developed countries, Uganda Revenue Authority (URA) has not implemented effective strategies to tax these online transactions. The purpose of this study was to obtain insights into the e-commerce category of potential taxpayers that will enable their inclusion into the tax bracket. Specifically, it was intended to get a clear understanding of the nature of operation of the e-commerce business in Uganda; identify the major products/ services traded through e-commerce; assess the revenue potential of e-commerce businesses and to assess the capacity of URA (policy, legal and administrative frameworks) to effectively tax e-commerce. This research employed both a qualitative and quantitative approach. It involved discussions with officials from various government agencies, Ministry of Finance, IT experts and App developers and some textual analysis of the existing academic articles, periodical reports from UCC and legal documents. The study also benefited from URA registration and compliance data. The study established that the sector is steadily growing in Uganda manifesting in almost all sectors of the economy. The e-commerce scope in Uganda includes but not limited to online marketing, sports betting, professional services, online retailing among others. These are greatly supported by the telecom and financial sectors that provides them the operating and payment platforms. Majority of the players were revealed highly non-compliant with their tax matters. There is very weak regulation of the sector in Uganda and the current tax laws were found inadequate to tax the sector players. On the administrative side, the study recommends that URA should assign staff to register these players, hire experts in this sector, benchmark from other countries and understand the relationship between telecoms and financial institutions. On the legal side, the residence and place of supply rules need to be amended to cater for e-commerce; URA should also introduce a withholding tax on all bank transactions originating from outside the country among others.

A return to progressive personal income tax in the Russian Federation: some estimations

This paper examines the possibility of reintroducing a progressive personal income tax in the Russian Federation and presents quantitative estimations of the possible outcomes of such a move. The main sources of statistical data for the analysis of distributions of taxpayers in terms of their income are considered (different resources of the Federal State Statistic Service and the Federal Tax Service statistics). The shortcomings of the existing statistical information were shown. Under the absence of officially published data on the distributions of taxpayers by income received, a lognormal distribution curve is simulated. The estimations of the distribution curve are based at the National Accounts data. Several systems of income tax brackets, rates and models of tax deductions are tested on these simulated data. The parameters of the tax burden shift onto the tenth decile of taxpayers and 1% of the highest-income taxpayers, a decrease in the decile ratio (in terms of disposable income) as well as changes in budget revenues according to tax scale options are estimated. The estimations show (1) none of the tested models of tax brackets, rates and deductions provides a principal reduction of the decile ratio (for disposable income); (2) a potentially significant reduction of the tax burden on the poorest groups of the population and the growth of the level of tax paid by high-income groups are possible; (3) it is possible to decrease the tax burden on the low income groups together with a rise of the budget revenue. The article concludes that it is necessary to test different variants of tax brackets, rates and deductions in real life circumstances and not on simulated data when progression in personal income tax is reinstated. Highlights 1. The lognormal distribution curve based at the National Accounts data is generated to evaluate the distribution of PIT (NDFL) taxpayers in terms of taxable income 2. Testing of the different progressive tax models (brackets, rates and deductions) based on this lognormal distribution curve allowed to make quantity assessments of the possible shift of the tax burden onto the tenth decile of taxpayers and to1% of the highest-income taxpayers 3. It is demonstrated that the progressive tax rates make it possible to decrease the tax burden on the low income groups together with a rise of the budget revenue For citation Lykova L. N. A return to progressive personal income tax in the Russian Federation: some estimations. Journal of Tax Reform, 2018, vol. 4, no. 2, pp. 174–187. DOI: 10.15826/jtr.2018.4.2.051 Article info Received June 12, 2018; accepted July 20, 2018

Smooth Income Tax Schedules: Derivation and Consequences

Existing tax schedules are often overly complex and characterized by discontinuities in the marginal tax burden. In this paper we propose a class of progressive smooth functions to replace personal income tax schedules. These functions depend only on three meaningful parameters, and avoid the drawbacks of defining tax schedules through various tax brackets. Based on representative micro data, we derive revenue-neutral parameters for four different types of tax regimes (Austria, Germany, Hungary and Spain). We then analyze possible implications from a hypothetical switch to smoother income tax tariffs. We find that smooth tax functions eliminate the most extreme cases of bracket creep, while the impact on income inequality is mostly negligible, but uniformly reducing.

Taxation and Innovation in the 20th Century

This paper studies the effect of corporate and personal taxes on innovation in the United States over the twentieth century. We use three new datasets: a panel of the universe of inventors who patent since 1920; a dataset of the employment, location and patents of firms active in RD and a historical state-level corporate tax database since 1900, which we link to an existing database on state-level personal income taxes. Our analysis focuses on the impact of taxes on individual inventors and firms (the micro level) and on states over time (the macro level). We propose several identification strategies, all of which yield consistent results: i) OLS with fixed effects, including inventor and state-times-year fixed effects, which make use of differences between tax brackets within a state-year cell and which absorb heterogeneity and contemporaneous changes in economic conditions; ii) an instrumental variable approach, which predicts changes in an individual or firm's total tax rate with changes in the federal tax rate only; iii) event studies, synthetic cohort case studies, and a border county strategy, which exploits tax variation across neighboring counties in different states. We find that taxes matter for innovation: higher personal and corporate income taxes negatively affect the quantity and quality of inventive activity and shift its location at the macro and micro levels. At the macro level, cross-state spillovers or business-stealing from one state to another are important, but do not account for all of the effect. Agglomeration effects from local innovation clusters tend to weaken responsiveness to taxation. Corporate inventors respond more strongly to taxes than their non-corporate counterparts.

Fiscal Drag as an Automatic Stability Tool, in the Case of New Regulation with Price Criteria in Automotive Sectors Special Consumption Tax (SCT)

Fiscal drag is a result of real or nominal expanding economy and progressive taxation. In general, individuals are forced to enter the upper tax bracket depending on their increased income or expenditure. More tax burden can result in less consumption. Fiscal drag, lack of spending or excessive taxation can cause the economy to slow down. Traditional view suggests that fiscal drag may serve as a natural automatic stabilizer to cool the economy. However, this view ignores the supply side and in particular the potential effects of the high tax burden on economy. This study examines the extent to which the expected automatic stabilization function can be performed and the possible side effects on economic balances and income distribution of fiscal drag in our country in the case of new regulation with price criteria in automotive sectors Special Consumption Tax (SCT).

Administration, Committees Issue Tax Reform Framework

September 27 brought the Trump Administration's, and Ways and Means and Finance Committees', “Unified Framework for Fixing Our Broken Tax Code.” Three proposals that would decrease charitable giving are included: reduction of individual tax brackets, a doubling of the standard deduction, and repeal of the estate tax. Here are the relevant features.

The Distributional Effects of the Trump and Clinton Tax Proposals

Hillary Clinton and Donald Trump, the Democratic and Republican candidates for President of the U.S. in 2016, proposed several changes in the federal tax code. Hillary Clinton would add a personal income tax surcharge of 4% on high annual incomes, limit the tax benefits of non-charitable deductions, set a minimum tax rate of 30% on taxpayers earning more than one million dollars a year, increase the tax rates on capital gains for taxpayers in the top tax bracket, and expand the base of the estate tax. Donald Trump would reduce the number of personal income tax rates, increase the standard personal deduction, cut all taxes on business income to no more than 15%, and abolish the inheritance tax. Using a tax calculator model, we estimate the static effects of these very different changes. Over a ten-year period, Clinton’s proposals would raise federal tax revenue by a total of $816 billion, an increase of 1.9% over projected baseline revenue, while Trump’s tax changes would lower tax revenue by $9.8 trillion. Clinton’s higher taxes would reduce incomes and revenue somewhat, while Trump’s tax cuts would potentially boost output substantially. Using an extended simulation model, we find that 86% of the incremental tax burden of Clinton’s tax increases would fall on those in the top tenth of the income distribution. Most other taxpayers would see only minor changes in their tax burdens, and the revenue and redistributive effects of her proposed changes are relatively modest. Meanwhile, 70% of Trump’s tax cuts would go to those in the top decile, and the effects are large, with gains of over $15,000 annually per person for this group, compared to gains of less than $500 per person for the poorest 40% of the population. On tax policy, the two candidates propose strikingly different policies.

Tax Bunching by Owners of Small Corporations

We study the options for income shifting by owners of small corporations in the Netherlands using bunching techniques on individual tax records over the period 2007–2011. We find that the distribution of gross labour income strongly peaks at the minimum level of the reference wage, specified in the tax code. Next, taxable labour income bunches at the cut-offs of the tax brackets. The elasticity of taxable income at the top tax cut-off ranges from 0.06 to 0.11. Distributed profits strongly responded to the temporary tax cut from 25 to 22% in 2007, which doubled tax revenues on dividends. We reconfirm the importance of intertemporal income shifting for business owners.

Can Individual Investors Use Option Strategies andthe Tax Code to Their Advantage?

This article tests whether high-income earners can earn excess risk-adjusted returns by annually exploiting the asymmetric U.S. tax treatment of long-term capital gains and losses using at-the-money (ATM) options. In this article, we run an initial analysis that tests the returns of the previous 50 years, from 1966 through 2015, that buys $3,000 of one-year ATM call options on the S&P 500 (SPY) to determine excess risk-adjusted returns for individuals of various taxable income levels. Additionally, we run a Monte Carlo simulation, based on long-term historical returns, standard deviations, and correlations, to test the robustness of the initial results for a risk-neutral investor. We find that call options can provide increased annual performance returns for all income levels. Furthermore, we conclude that these strategies also provide excess risk-adjusted returns for high-income earners in the 28% and higher income tax brackets.

A Snapshot of the Australian Taxpayer

Using the most recent Australian Taxation Office published data, and other sources of data, we provide detailed descriptive evidence on the income, deductions, and other items (including superannuation) of the individual taxpayer in Australia. We provide this detail across tax bracket, occupation, gender and location. In addition, we explore who is accessing negative gearing and by how much, thus contributing to the ongoing debate that surrounds this area of tax law. We show that individuals with a higher taxable income are more likely to access negative gearing, and we provide estimates of how the removal of this deduction would affect Federal tax revenue. We discuss other reported areas such as deductions for gifts and donations, as well as providing a discussion on the use and potential use of the Government provided pre-filled tax information for individuals. Overall, this study is of interest to academics, government and tax practitioners alike.

Trends in Personal Income Tax Progression in OECD Countries in the Context of Income Redistribution

In recent years there has been an evident, widespread increase in income disparities in OECD countries. Progressive Personal Income Tax, which enables adjustment of the tax burden to individual’s capacity to pay, is one of the fundamental instruments used in redistribution policy. The aim of the paper is comparative analysis of the level of Personal Income Tax (PIT) progression in OECD countries and identification of trends in progression in the context of income redistribution. The article discusses the progressivity level of PIT in OECD countries measured by the differences in the burden at different levels of income. The cross-country and historical trends in the statutory PIT rates, the number of tax brackets and the provisions which exempt an initial level of income from tax burden are analysed and graphically illustrated.

Kalte Progression wird nach Einführung der Schuldenbremse ein zunehmendes Problem

As taxpayers typically pay relatively little attention to low levels of inflation induced income tax bracket creep, policy makers tend to regularly postpone correction of this problem. Eventually, however, the fiscal illusion fades away, and political pressure for tax relief arises once the cumulative increase of the average tax rate exceeds a critical threshold. Using Germany as an example, it is shown that bracket creep can provoke revenue cycles in public budgets that hinder governments’ compliance with the numerical budget rules. An indexation of the tax tariff, which would provide an automatic correction for bracket creep, could prevent such fluctuations and thus provide a favourable framework for the debt brake.

Using Tax Deductions to Promote Lifelong Learning: Real and Shifting Responses

Policymakers are concerned about potential underinvestment in lifelong learning. In this paper we study to what extent a tax deduction helps to stimulate post-initial training. Speci fically, we employ a regression kink and regression discontinuity design as jumps in tax bracket rates generate exogenous variation in the effective costs of lifelong learning. Using high quality data on tax returns of the universe of Dutch taxpayers, we nd that the tax deduction has heterogeneous effects on lifelong learning. Low-income singles show no response. For high-income singles we nd an effect of 10% on the probability to use the tax deduction. Furthermore, ignoring shifting of expenses between partners leads to spurious large estimates for primary earners and spurious negative estimates for secondary earners.

Labour force participation elasticities and the move away from a flat tax: the case of Slovakia

This paper provides a microeconometric analysis of labour force participation elasticities in Slovakia where we study the elasticity with respect to a unique tax reform whereby the flat tax was backtracked and replaced by a progressive tax. By estimating a probability model for labour force participation, we show that the low-skilled and females are groups that are particularly responsive to changes in income taxes and transfers. We perform a microsimulation analysis of two scenarios of flat-tax regime abolishment. We find that the recent departure from the flat-tax system in Slovakia in 2013, which introduced two tax brackets in personal income taxation, only negligibly reduced the average probability of being economically active at the extensive margin. A more significant average effect has been found in a hypothetical scenario with a similar fiscal revenue impact, simulating a departure from the flat-tax system by reintroducing five tax brackets. We show the different impacts of the two distinct scenarios of abolishing the flat tax on selected subgroups of the population. JEL Classification: H31, H53, I38, J21

Estimating the Elasticity of Broad Income for High-Income Taxpayers

This paper precisely estimates the elasticity of broad income (EBI) with respect to the marginal net-of-tax rate for high-income taxpayers. We study the introduction of a new top income tax bracket in 2013 using a large panel of high-income taxpayers drawn from administrative tax records. Our estimation strategy — inverse probability weighting — takes into account the tremendous income volatility experienced by high-income taxpayers. We obtain an intent-to-treat (ITT) EBI of 0.013. After rescaling to account for taxpayers crossing the top income tax bracket threshold, we obtain a treatment-effect-on-the-treated elasticity that is bounded below by the ITT estimate and above by 0.034.

Fiscal Autonomy and EU Structural Funds

In light of the principle of additionality, the inflow of European Union (EU) funds should complement domestic public funds, which are required to cofinance the investment. EU funds should either be unrelated to fiscal decisions of recipient regions, and as such should not affect taxation choices, or they could imply an increase in taxation to finance the additional domestic funds required by the additionality principle. Empirical results linking fiscal autonomy of Italian regions, considered by looking at the number and the level of average tax rates for the regional surcharge on the personal income tax and committed EU funds, suggest the existence of a significant relationship, even after controlling for relevant economic and political factors. The level of average tax rates is lower the more EU funds are received, as is the complexity of the system, measured by the number of income tax brackets.

Measuring Revenue-maximizing Elasticities of Taxable Income

This article considers the question of whether marginal tax rates (MTRs) in the US income tax system are on the “right” side of their respective Laffer curves. Previous attention has tended to focus specifically on the top MTR. Conceptual expressions for these “revenue-maximizing elasticities of taxable income” (ETI L), based on readily observable tax parameters, are presented for each tax rate in a multi-rate income tax system. Applying these to the US income tax, with its complex effective marginal rate structure, demonstrates that a wide range of revenue-maximizing ETI values can be expected within, and across, tax brackets and for all taxpayers in aggregate. For some significant groups of taxpayers, these revenue-maximizing ETIs appear to be within the range of empirically estimated elasticities.