Tax Brackets Research Articles

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.

Implementing the Capitalism/Socialism Cycle Phase II Melting the Excessive Executive Compensation Employee Stock Option Icebergs

The author’s introductory work, i.e., The Capitalism/Socialism Cycle – Phase II (we refer to the work as the “First Article”), heralds the introduction of a more efficient form of capitalism or Thin Capitalism (“TC”) , primed first by the Economic Recovery Tax Act (“ERTA”) of 1981 and the simple indexation of tax brackets, and then triggered with the Great Recession of 2007-2009 (“GR”), which began a de facto untangling of the symbiotic relationship that exists between American business and the Federal Government and the beginning of the end for Fat Capitalism (“FC”). In Implementing The Capitalism/Socialism Cycle – Phase II – Melting the Excessive Executive Compensation Employee Stock Option Icebergs, [we refer to this work as “Iceberg”] the author zeroes in on twelve irregularities of employee stock options or ESOs, the workhorse of FC as suggested in the First Article, the correction of which are a starting point in the conversion of FC to TC. This paper is the second installment in a trilogy that will conclude with a third paper that will offer remedies to our economic system against the backdrop of the social and cultural values of the American Experience. There is a suggestion then in this offering that there is an extraordinary amount of direct and indirect information about ESOs that is unseen and therefore virtually unknown across the multiple disciplines attendant to this critical form of stock-based compensation. It also introduces the question of how so much important information necessary for the efficient and effective functioning of this important financial instrument of capitalism could be so conveniently overlooked. It is overlooked, in large part, because it is in the best interests of those plying their trade to overlook them. Iceberg discusses twelve of its own, i.e., important ESO issues that are there but whose existence currently enjoys some type of artful or elusive status. Briefly, they are: 1. ESO taxation at grant – the U.S. Treasury vs. the Taxpayer; 2. Robinson v. U.S. [2003] – a major retrofit of Internal Revenue Code §83 (“IRC§83”); 3. Insider use of listed, exchange-traded options (“LETOs”); 4. SEC Release No. 34-60126 [June 17, 2009]; 5. The Transferable Stock Option or TSO; 6. Listed Exchange Traded Options and the Charitable Lead Trust; 7. Listed Exchange Traded Options and the Estate of the Corporate Executive; 8. The Incentive Stock Option Planning Dilemma – The Married Put; 9. Senator Levin – The Ending Excessive Corporate Deductions for Stock Options Act; 10. LETO Use in Financial Reporting – ASC 718, Compensation-Stock Compensation; 11. Emperor’s [Employer’s] Clothes-ESOs Don’t Work So Well; 12. An IRS-Approved Grant-Based Taxation Protocol for ESOs. In Iceberg, the author zeroes in on the above irregularities of ESOs as a starting point in the conversion of FC to TC. This conversion will take place in a two-part process, the first of which is a need to make current forms of equity compensation more efficient by proper tax, regulatory and investment planning. The C.A.S.H. TM method planning protocol is introduced to do just that. The second part of this process is to introduce and implement new forms of equity compensation that are, by their very nature, more efficient and effective which will obviate the necessity for such planning greatly.

Individual Investorss Dividend Tax and Corporate Payout Policies Evidence from a Reform that Ties the Dividend Tax Rate to Share Holding Period

The 2012 Dividend Tax Reform in China uniquely ties individual investors’ dividend tax rates to the length of their share holding period. We find that firms facing a reduction in their individual investors’ dividend tax rate are more likely to increase dividend payout, initiate dividends, and are less likely to omit dividends, compared with firms facing an increase in their individual investors’ dividend tax rate. Such an effect is concentrated in firms with a low level of agency cost. In addition, investors respond to this tax law change by reducing trading activities before the cum-dividend day to avoid entering into a higher dividend tax bracket. Further, stock return patterns on the ex-dividend day suggest that reduced trading activities lower the marginal investor’s dividend tax penalty. Overall, our evidence enhances the notion that individual investors’ tax profiles shape firms’ payout policies.

Revenue-maximising tax rates and elasticities of taxable income inNew Zealand

The empirical literature on the elasticity of taxable income (ETI) sometimes questions whether estimated values are consistent with being on the revenue-increasing section of the Laffer curve, usually in the context of a single rate tax system or for top marginal rates. This paper obtains expressions for this ‘Laffer-maximum’ or revenue-maximising ETI which can be applied to any tax rate in a multi-rate system. For the New Zealand income tax system in 2010, it is found that a wide range of revenue-maximising ETI values can be expected across individual taxpayers, across tax brackets and in aggregate. The paper also simulates the effect of multi-rate tax reforms on these revenue-maximising ETIs.

Measuring Revenue-Maximising Elasticities of Taxable Income: Evidence for the US Income Tax

A recent review of empirical estimates of the elasticity of taxable income (ETI) concluded that ‘the US marginal top rate is far from the top of the Laffer curve’ (Saez et al, 2012, p.42). This paper provides a detailed examination of the analysis underlying this conclusion, and considers whether other tax rates in the US income tax system are on the ‘right’ side of the Laffer curve. Conceptual expressions for ‘Laffer-maximum’ or revenue-maximizing ETIs, based on readily observable parameters, are presented for individuals and groups of taxpayers in a multi-rate income tax system. Applying these to the US income tax in 2005, with its complex effective marginal rate structure, demonstrates that a wide range of revenue-maximizing ETI values can be expected for individual taxpayers within and across tax brackets, and in aggregate. For many taxpayers these revenue-maximizing ETIs are well within the range of empirically estimated elasticities.

The impact of changes in the Personal Income Tax Act on the average tax rate

The Government of the RC, at its session on October 30, adopted a proposal for amendments to the Personal Income Tax Act, which had been announced for some time. In this article, we comment on changes to the amount of the basic personal allowance and the size of tax brackets. After the changes, the personal income tax system will continue to be progressive, while the average tax rate will decline for all taxable persons whose tax liability under the current scheme is greater than zero kuna.

Ordinary Medical Expenses

Although extraordinary medical expenses are appropriately deducted to compute a taxpayer’s standard of living, taxpayers should bear ordinary medical expenses out of their post-tax income, with no allowance beyond personal exemptions, the standard deduction, and low tax brackets. The proposal defines ordinary expenses as less than 15 percent of adjusted gross income. Consistently, tax-excluded employer healthcare plans appropriately cover extraordinary medical expenses. The proposal would not allow an exclusion for plans that cover ordinary medical expenses, defined by the same 15 percent level. The deduction of ordinary medical expenses and the exclusion of insurance plans that cover those expenses cause wasteful inflation of medical costs. Deductions and exclusions to accomplish a subsidy are not a way to help the needy, they inappropriately benefit the highest-bracket taxpayers as if their health and life were worth more. The proposal is offered as a part of the Shelf Project, a collaboration of tax professionals developing methods of raising revenue, in ways that improve the fairness and efficiency of the tax base. The Shelf Project has 68 proposals so far. Comments are welcome either as public debate, directed to the Tax Notes editor, or privately to cjohnson@law.utexas.edu.

Recent Evidence on the Taxpayers’ Reporting Decision in Greece: A Quantile Regression Approach

1. Introduction The examination of the taxpayers' behavioral response to changes in marginal tax rates is essential in estimating the impact of different tax policies so as to minimize the individual's bias and avoid erroneous policy recommendations. The effectiveness of government intervention is affected by changing behavior, as taxpayers' reporting decisions are subject to the prevailing tax schedule. The lack of government revenues can also be partially explained by the potential responsiveness of taxpayers. Given that Greece is considered a country with a high rate of tax avoidance and evasion, the estimation of the reported income elasticity could prove useful, especially for policy makers and taxpayer advocates, for the evaluation of alternative tax policies and the prediction of tax revenue effects. Initially, labor supply elasticities were used to design appropriate tax and fiscal policies, though these are likely to underestimate taxpayers' response to tax rate changes, measuring only how taxpayers alter their work schedule. Recent studies have used elasticities of (taxable) income, accounting explicitly for tax avoidance and implicitly for exclusions and deductions (e.g. Lindsey, 1987; Feldstein, 1995; Sammartino and Weiner, 1997; Auten and Carroll, 1999; Gruber and Saez, 2002). The obtained results vary though considerably, depending on the method of estimation used, the particular tax reform examined and the country under consideration. Two reasons may explain the conflicting results. First, it is often problematic to compare reported income before and after a tax reform, as changes in the definition of taxable income are introduced apart from tax rate changes. Second, most studies attribute the widening of income inequality to tax reforms, though evidence has shown that other factors may have increased inequality. Nevertheless, results show that income heterogeneity should be considered when estimating the taxpayers' reporting decision, as the responsiveness of taxable income to taxes may be higher in higher income classes, for which a larger share of income is likely to come in forms that are easier to hide from tax authorities (Thalassinos and Liapis, 2013). A suitable approach for this line of empirical analysis was recently employed by Alm and Wallace (2007 and 2010); namely quantile regression. Quantile regression was developed by Koenker and Bassett (1978) as a robust alternative estimation technique compared to conditional mean regression against outliers, and a useful approach in cases of heteroskedasticity. The magnitude of differential responses across income classes can be further examined, since regression quantiles allow analyzing the responsiveness of a wide range of reporting behavior to marginal tax rates and the responses of individuals at different points of the income distribution; a task that is not investigated thoroughly. Both empirical studies estimate though taxpayers' reporting decision using arbitrarily 'typical' quantiles such as 0.2, 0.4, 0.6, 0.8, which are very unlikely to always correspond to income classes that are taxed differently so that the reported estimations may lead to a possible bias of the real magnitude of the differential responses across income classes. In addition, using quintiles, that is a 'truncation on the dependent variable' that segments the sample into subsets based on its unconditional distribution, and doing least squares fitting on these subsets yields to inconsistent estimates (Koenker and Hallock, 2001). Such strategies are condemned to failure for all the reasons so carefully laid out in Heckman's (1979) work on sample selection, implying that the reported OLS quintiles estimations should not be directly compared to the respective quantile regression estimations. In this framework, this paper contributes to the examination of the responsiveness of a wide range of reporting behavior to marginal tax rates and the responses of individuals at the different points of the income distribution that correspond to specific tax brackets. …

Information Literacy in Top Schools of Business Evident to the Outside World?

Maintaining a competitive advantage in the business world has become an increasingly daunting task. As high-stakes big-business decisions raise equity in sections of the globe not seriously tapped before, companies look to their employees as assets to help make a difference. Those that are tasked with making unique and significant contributions to the bottom line are more often than not leaders who are equipped with a MBA from an accredited university. As much as having this type of credential may help graduates enter a new career, it does not necessarily indicate that they are equipped with the skills necessary to move a company into a higher tax bracket. The skills needed to obtain, decipher, analyze and plan around various pieces of vital information are fundamental aspects of information literacy. Is it safe to assume information literacy is part of the core curriculum of today’s top MBA programs? Is it even safe to assume information literacy is an overall element found in most American Universities? Even if the answers to both these questions were a resounding “yes,” how can we tell? The research conducted in this study examined the “search” functions on both Business and University-level web pages of institutions in U. S. News & World Report’s Top 25 MBA Programs to determine if the presence of information literacy could be confidently acknowledged. Along with examining the state of information literacy in business programs across the country through peer review, we hope to come to a conclusive determination of where present-day programs stand. DOI: 10.5901/ajis.2013.v2n8p26

Federal income tax laws that cause individuals’ marginal and statutory tax rates to differ

• Presents 20 phaseouts of 2013 individual tax breaks in a table as a teaching tool. • Phaseouts increase individual taxpayers’ marginal tax rate above their tax bracket. • Table includes how each phaseout works, its AGI range, and its formula to compute MTR. • Article contains 16 illustrations for use in class, as homework, and exam questions. • Phaseouts table is updated annually and is available upon request: geisler@umsl.edu. This article presents a “phaseouts table” as a tax educational tool. The table compiles and summarizes the phaseouts of and limitations on deductions, credits, exclusions from income, and allowed contributions for individual U.S. federal income taxpayers in 2013. Phaseouts can cause individual taxpayers’ marginal tax rate (MTR) to be higher than their statutory tax rate (STR) (i.e., “bracket” based on taxable income). For each phaseout, the table includes how the phaseout works, the adjusted gross income (AGI) range for the phaseout, and the related formula to compute MTR, given STR. The table is appropriate for any course that covers either U.S. federal income taxation of individuals or tax planning. (The phaseouts table is updated annually and is available upon request from the author.) The remainder of the article is a teaching resource, explaining how to compute the specific impact on MTR of each of several example phaseouts. Together, the phaseouts table and article enable U.S. tax instructors to assist students in learning about phaseouts in an integrated, comprehensive manner.

Tax bracket creep and its effects on income distribution

We quantitatively analyze the way inflation alters the inequality of the income distribution in the U.S. economy. The main mechanism emphasized in this paper is the “bracket creep” effect according to which inflation pushes income into higher tax brackets. Governments adjust the nominal income tax brackets slowly and incompletely due to the rise in prices. In the U.S. postwar history, this typically happens less often than once every other tax year. In the first part of the paper, we study time series from the U.S. economy. As our central result we find that irrespective of the level of inflation more frequent income tax schedule adjustments make the relationship between inflation and income inequality more transitory in nature. In the second part of the paper, we develop a general equilibrium monetary model with income heterogeneity that is in line with our time series evidence. We find that a longer duration between two successive adjustments of the tax schedule reduces employment, savings, and output.

Elements of Compliance Costs: Lesson from Malaysian Companies towards Goods and Services Tax (GST)

Various parties including academics, professionals and the society (the potential GST payers) are arguing about the introduction of GST in Malaysia. Goods and Services Tax (GST) or Value Added Tax (VAT) is a consumption tax imposed on the sale of goods and services. The Malaysian government introduce this potential tax mechanism, in order to increase the existing tax bracket and replacing the long-implemented service and sales taxes. With the introduction of GST, the Malaysian government felt it would provide them with the prospect to reduce the rates of individual and corporate income tax. However, do all companies particularly small and medium enterprises (Companies) ready to adopt the systems efficiently? If they could adopt the system, how much their compliance costs involved such as developing new software, human resource training and accounting systems? The objective of this paper is to obtain companies’ compliance costs and its elements and to provide suggestions to the tax authority what are the essential of companies to minimize their compliance costs. The data was collected through questionnaire from various enterprises throughout Malaysia. This paper is expected to suggest a proposal to the relevant authorities on the impacts on those companies. The government should also provide some special tax incentives to compensate the initial compliance cost incurred by small enterprises in particular so that they are not burdened by the newly implemented GST.

A consignment stock coordination scheme for the production, remanufacturing and waste disposal problem

This paper extends the model of a production, remanufacturing and waste disposal system by adding a buyer (retailer) to the vendor’s system to form a two-level forward/reverse supply chain. The vendor and the buyer are assumed to operate according to a consignment stock policy. A mathematical model is developed for the cases when the production and remanufacturing batches are of different and equal sizes. The model also accounts for transportation, inspection and sorting costs. Numerical examples are provided and results are discussed. The results show that the collection rate of used items and the repairable rate have a significant impact on the total cost of the system and the batch sizes. It was suggested that it may not be possible to operate a system like the one described in the paper at its maximum environmental edge without receiving some incentives or tax brackets. Another possibility is for the system to undergo a continuous improvement process to reduce its operational costs, which may require additional investment.

Tax Efficiency v Tax Optimality

Strategies to efficiently manage the tax aspects of investing have been extensively researched and developed over the past several decades. In 1986 Joseph Stiglitz outlined a general set of principles of tax avoidance which focus on 1) postponement of capital gains 2) arbitrage between investors in different tax brackets or the same investor across time and 3) arbitrage between income, short term capital gains and long term capital gains. The application of these principles has generally led to 1) minimizing turnover, 2) deferring capital gains and 3) minimizing income. [Stiglitz, 1986]The field has evolved to equate low turnover with tax efficiency. The scope of this paper is to illustrate that high turnover strategies can be superior to low turnover strategies with taxes as a consideration in portfolio construction. Additionally, hedge funds for high net worth Individuals are typically unattractive after tax. Turnover is high, and the income is typically distributed through a K1 as income and not as a capital gain. The typical strategies to mitigate this are options overlays, or total return swaps both of which can be expensive. Simply shifting the hedge fund strategy to a separate account and actively distributing losses can eliminate the after tax headache many high net worth Individuals face when considering a hedge fund.

Taxation, Tyranny, and Theocracy: A Biblical Response to Susan Hamill

I respond to Prof. Hamill’s assertion that she is not recommending the exercise of theocratic power, as defined by Rev. Gregory Boyd. She is in fact a theocrat in terms of Rev. Boyd’s definition. In two previous peer-reviewed articles, she has called on Christians to organize politically in order to re-stricture specific tax codes. She has said that Christians have the votes to do this: around 80 percent of the electorate. She has identified what the top federal tax bracket rate should be: 50 percent. This is in addition to state and local taxes. She has made this call to political action on the basis of a specific ethical system: Christianity. Her social outlook is consistent with a Protestant tradition known as the social gospel. She says that the Bible has provided Christians with the basis of tax reform. I agree entirely with her regarding the legitimacy of such a call to political action by Christians. But I do disagree with the biblical texts she uses to argue her case. I use the Bible’s tax texts, plus the Mosaic text that affirms the rule of law (Exodus 12:49) and also the text mandating the equal application of justice, irrespective of wealth (Leviticus 19:15).

Key Amendments to Slovak Tax Legislation

This note outlines recent legislative developments in the Slovak Republic, in particular, an increase in the corporate income tax rate, the introduction of a special levy for businesses in regulated industries and a return to progressive taxation of the income of individuals through the introduction of a second tax bracket.

The Capitalist/Socialist Cycle – Phase II: Thoughts on a More Efficient Form of Capitalism

The author’s undergraduate thesis work in American Studies and post-graduate writings and thesis in Taxation are the basis for defining the Capitalism/Socialism Cycle ('Cycle'), a socio-economic ebb and flow currently in the final stages of its first phase in America. The author calls for a more efficient form of capitalism, currently in its Fat Capitalism ('FC') stage.The author asserts that FC is at its denouement prompted without fanfare by the Economic Recovery Tax Act ('ERTA') of 1981 and the simple indexation of tax brackets, forcing ever greater amounts of taxable income to be taxed at lower rates of taxation. When coupled with the severe recession of 2008-2010, the result are dizzying additions to the national debt via annual budget deficits in excess of $1 trillion as declining tax revenues are mismatched against a recalcitrant government unwilling to reduce its spending.Against the backdrop of Modern Portfolio Theory ('MPT'), the efficient frontier ('EF') and the Security Market Line ('SML'), the author calls for equity capital to be more efficient. Using a balloon analogy, the author describes FC, a partnership between government and business, as being bloated and unguided, eventually calling for a thinner more directed version of itself, i.e., Thin Capitalism ('TC'). The lynchpin for these alterations begins with changes to employee stock options ('ESOs'), the workhorse of FC and suggests that this one remedy is a good starting point for curing what ails the capitalistic system.The author takes the reader through the current tax treatment for ESOs and suggests that such treatment is endemic of the relationship between government and business. The risks and returns from ESOs are explored through the eyes of the employee who serves as conduit for the employer’s equity capital replacement process, as discussed by the author, highlighting the extraordinary compliance burden surrounding ESOs for both employers and employees.The author focuses on ESO valuation models in anticipation of his final recommendation, calling for that more efficient form of capitalism or TC, reviewing the Financial Accounting Standards Board’s ('FASB') Accounting Standards Codification ('ASC') 718, Compensation-Stock Compensation, which provides the impetus for a change in, not only the tax treatment of ESOs, but a fundamental change in the instrument itself and the way that employees are compensated with equity. A key focal point for this change is Securities & Exchange Commission ('SEC') Release No. 34-60126 issued June 19, 2009 which is the basis for an entirely new, equity based financial instrument.

Ex-Dividend Behaviour and the Clientele Effects: Evidence Based on Canadian and US Dividend Tax Cuts

We investigate the ex-dividend behaviour of TSX listed Canadian firms during a period when both U.S and Canadian governments cut taxes on dividend income. We test whether the tax differential between dividends and capital gains affects the stock price drop ratio on ex-dividend date. Using quarterly dividend date from 2002-2007, we also investigate the existence of dividend tax clientele effects. We provide empirical evidence that relative tax differential of dividends and capitals gain has significant effects on investor behaviour on ex-dividend date consistent with the hypothesis that dividend tax affects equity values. We also find evidence that Canadian Investors, not the US investors, are the marginal investor for Canadian securities. We suggest that the use of appropriate tax variables is essential for detecting the relationship between tax and ex-dividend day behaviour, as our study has shown that tax relevance hypothesis upholds when the marginal tax rate of Canadians is introduced as tax variable, unlike when that of the US is employed. These findings undermine the claims in some prior studies that tax is not relevant on ex-dividend day. Our study also documents dividend clientele effect using Canadian data. We provide evidence that dividend yield is positively related to drop ratio as in Elton and Gruber (1970) and inversely related to implied tax rates consistent with investors in high tax bracket being attracted to low dividend stocks and investors in low tax bracket preferring high dividend stocks. This clientele effect persists across different measures of drop ratio.

Revenue-Maximising Elasticities of Taxable Income in Multi-Rate Income Tax Structures

The empirical literature on the elasticity of taxable income (ETI) sometimes questions whether estimated values are consistent with being on the revenueincreasing section of the Laffer curve, usually in the context of a single rate tax system or for top marginal rates. This paper develops conceptual expressions for this ‘Laffer-maximum’ or revenue-maximising ETI for the multi-rate income tax systems commonly used in practice. Using the New Zealand income tax system in 2010 to illustrate its properties, the paper demonstrates that a wide range of revenue-maximising ETI values can be expected across individual taxpayers, across tax brackets and in aggregate.

The Potential Impact of Tax Reform on Farm Businesses and Rural Households

Several proposals calling for fundamental reform of the Federal income tax system have been put forth, including a report by the co-chairs of the National Commission on Fiscal Responsibility. The primary elements of reform — eliminating tax preferences, restructuring capital gains and dividend tax rates, lowering rates on individual income, and reducing the number of tax brackets — could have a significant impact on the after-tax income and well-being of both farm businesses and rural households. This report uses published and special tabulation data obtained from the Internal Revenue Service, farm-level data from USDA’s Agricultural Resource Management Survey, and data from the American Housing Survey to examine the current tax situation for farm households and to evaluate the importance of various Federal income tax policies. For farm households, the effect of reform will primarily depend upon changes to existing treatment of investment and business income, including several important business deductions. In contrast, changes to existing individual tax credits, especially refundable tax credits, will likely be of greater significance to nonfarm rural households.