Tax Credit System Research Articles

Getting the State out of Pre-School & Childcare: Ending the Nannying of UK Parents

Decisions on childcare arrangements were largely a private matter until the 1990s. A political consensus has since arisen that government action is needed to raise the quality of provision, to make it more affordable and to support parental labour market attachment. Childcare and pre-school policy is accordingly a fast-growing area of state intervention. The UK now spends more than £7 billion of taxpayers’ money per year on these areas, and heavily regulates the childcare sector. Government directly provides childcare, gives financial support (via a ‘free’ hours entitlement, the tax credit system and the forthcoming ‘tax-free childcare’) and closely regulates the sector (determining staff-child ratios, qualifications and training requirements, and the Ofsted inspection regime). It makes other interventions through Children’s Centres, aimed at disadvantaged children and their families. The growing state involvement has been associated with childcare that is expensive by international standards, with high out-of-pocket costs to parents despite increasing levels of state subsidy. Many lower-cost providers such as childminders have been driven out of the sector. Childcare subsidies have a significant displacement effect on private sector activity. There is only limited evidence that they increase female labour force participation – and any increases come at a high budgetary cost. Nor do most interventions seem to lead to lasting improvements in child development. There is also a disconnect between parents’ preferences and the prescriptions of experts. Analyses claiming ‘market failures’ in childcare are weak: they assume that government has the knowledge and ability to perfectly account for all external effects. Arguments that we should subsidise childcare to maximise parents’ economic contribution confuse recorded GDP with general economic welfare. Government subsidy and regulation of childcare and pre-school is a ‘feel-good’ policy which it is difficult to challenge or question. But it should be fundamentally reassessed, under the guiding principle of allowing parents to make free choices about the types and quality of provision they want for their children. Regulation of the childcare and pre-school sector should be scaled back – creating a competitive environment in which costs would fall while government regulation would be replaced by private forms of quality assurance. Universal free care should be scrapped, along with ‘tax-free’ childcare and the Early Years Foundations Stage. Any state intervention should be targeted towards poorer families with low levels of labour market attachment, rather than (as often at present) having perverse re-distributional consequences. Some groups do badly out of government intervention: there is a hidden ethnic dimension as some minority groups do not make much use of formal childcare, while others have been squeezed out of work as childminders by excessive regulation. Failure to change course risks beneficiaries of childcare subsidies – both providers and consumers – becoming entrenched interest groups, continually demanding more taxpayer money for confused and uncertain outcomes.

A Comparative Analysis of the Indirect Foreign Tax Credit in Latin America and in the United States – Part I

This article compares the indirect foreign tax credit systems applied in Latin America and the United States. Part I deals with Argentina, Chile and Colombia. Part II considers Mexico and the United States. It then compares these systems and examines the policy issues arising, before offering some conclusions and recommendations.

Thanks, but No Thanks: Companiess Response to R&D Tax Credits

This paper starts from the observation that the majority of firms in Belgium that were eligible for a newly introduced R&D tax credit system does not use it, or is slow to adopt, despite significant potential cost savings. We hypothesize that the R&D support landscape is complex for firms to navigate and that they may cope by relying on their peers’ behaviour to inform their own adoption decisions. We identify endogenous peer effects in industry- and location-based peer groups by exploiting the intransitivity in firms’ peer group networks as well the variation in peer group sizes. The results show that firms’ decisions to use R&D tax credits are indeed influenced by the choices of their peers, primarily in the time window following the introduction. Our analysis complements the literature on peer effects in firm decision making and suggests improvements for the communication of new public support measures for business R&D.

British tax credit simplification, the intra-household distribution of income and family consumption

The UK Government enacted simplification of its tax credit system in 2003. An interesting consequence of the reform is that tax credit payments were split between partners in couples, causing a rare wallet to purse transfer. This paper presents evidence on family spending from the reform, using quasi-likelihood techniques, for a sample of low income couples with children. A key result is the absence of reform effects at the level of eleven broad spending categories. However, this masks important within category changes. For specific expenditure items, significant increases are observed amongst household public goods that have an important child development aspect; whilst spending decreases are observed amongst household public goods that disproportionately benefit parents. Results are contrasted to earlier findings from 1970s child benefit reforms. The effects are consistent with a non-cooperative bargaining framework, in which partners differ in their relative preference for different household public goods.

The Demise of Tax Credits

AbstractIntroduced in the late 1990s, tax credits grew under successive Labour governments to become a cornerstone of UK social policy. Distinguished from traditional welfare policies by their target group and their mode of administration, and with goals that appeared capable of commanding support across the ideological spectrum, tax credits until recently seemed to hold the key to tackling poverty in a politically popular manner. But since 2010 the tax credit system has been systematically dismantled, initially qualitatively and latterly also quantitatively. This paper discusses the multiple factors that help to explain the rapid fall from grace in the UK of this liberal approach to supporting the incomes of poor working households.

A mixed complementarity model for the US biofuel market with federal policy interventions

AbstractPolicymakers in the USA have provided various mechanisms to grow the domestic biofuel industry. One of the most significant policies in the USA is the volume mandate specified within the Renewable Fuel Standard (RFS). There are a number of other overlapping factors that impact the use of biofuels, namely the so‐called blend wall, or the 10% blend limit of ethanol in gasoline, along with a complex system of tax credits. All of these policies directly affect the value of a Renewable Identification Number (RIN), the tradable compliance certificate created as part of the RFS. Regulators track RIN prices carefully because they are a measure of the cost of compliance. In this work a mixed complementarity problem (MCP) is presented to combine these market dynamics into one model. This tool was specifically designed for policymakers to compare scenarios and study the effects on key market variables including RIN, gasoline, and diesel prices, along with production quantities for a number of different finished blended fuels. Our results suggest that RIN prices will increase with an increase in the volume of biofuel mandated by the Environmental Protection Agency (EPA); however the behavior of the different RIN prices depends on how the biofuel volumes are assigned among all the subcategories. Under scenarios investigated in this study, it is likely that a primary compliance strategy is to blend more biodiesel into diesel fuel. This behavior would increase the price of the D4 RIN but the premium could be mitigated by reinstating the biodiesel production tax credit. © 2015 Society of Chemical Industry and John Wiley & Sons, Ltd

The Optimal Long-Run Earned Income Tax Credit System

The Earned Income Tax Credit (EITC) became a prominent social tool especially in the US where the maximum federal credit reaches 45 percent of the wage. In this paper we ask the following question: assuming that in the long-run From Welfare to Work Program succeeds in increasing the propensity to work by the Working Poor; what is the optimal combination of EITC and transfers to the unemployed? Will the optimal EITC increase or decrease in the long-run? For this purpose we add to Saez (2002) seminal contribution an endogenous elasticity of labor participation. The addition of this feature can be compared to the sensitivity analysis conducted in Saez’s simulations, in which he examined how different (exogenous) levels of the extensive margin elasticity affect the respective magnitudes of the EITC and guaranteed income. Like Saez, we find that (in most cases), a higher extensive margin elasticity yields a higher EITC and lower guaranteed income. However, we find that with an endogenous extensive margin elasticity this effect is much weaker, and in some cases it is even reversed, due to the fact that in the endogenous case a high extensive elasticity is obtained when low income individuals have a high labor aversion, and thus the initial share of unemployed individuals is larger relative to the working poor - which makes the EITC a less attractive tool for the policy maker. Our simulations show that when the initial share of working poor is small enough relative to the unemployed the expected long run reduction of labor aversion produces an increasing optimal EITC, whereas in the case in which the initial proportion of the unemployed is low relative to the working poor, the reduction of labor aversion produces a decreasing optimal EITC.

Testing for the Ratchet Effect in the R&D Tax Credit

Many countries have implemented the R&D tax credit to encourage firms’ R&D spending. The design of the tax credit is important for its effectiveness. Some countries such as Korea, Taiwan, Japan, France and the US have employed an incremental R&D tax credit system. The US case that made a major change in its design from the moving average base to the fixed base in calculating the credit provides us with a natural experiment to measure the effectiveness of the tax credit from the perspective of the ratchet effect. By applying an endogenous switching regression model to US manufacturing firm data, we attempt to measure the ratchet effect of R&D credit on firms’ R&D investment. According to the empirical results, the R&D tax credit policy has been effective with the price elasticity, –1.818, for the qualified firms, and the re-design of R&D credit improved the positive impact of R&D credit. This provides some policy implication for those countries that adopted an incremental credit system. In addition, our result suggests the existence of selectivity bias in the previous literature.

Extending Taxation of Interest and Royalty Income at Source An Option to Limit Base Erosion and Profit Shifting?

This paper discusses tax policy measures to reduce corporate tax avoidance by extending taxation in the source country without imposing double taxation. We focus on four options: Bilaterally restricting interest and royalty deductibility, introducing an inverted tax credit system, levying withholding taxes on all interest and royalty payments and levying withholding taxes as an anti-avoidance regulation. We calculate the tax revenue effects of introducing a minimum withholding tax on royalty payments and an inverted tax credit. For the withholding tax we find that the US would suffer the greatest tax revenue losses, while some other countries would increase their tax revenue. In general, gains and losses depend not only on net balances in royalty income flows but also on withholding tax and credit rules under the status quo. The inverted tax credit would increase tax revenue in particular in high-tax countries. Revenue redistribution would only arise if withholding taxes were replaced by the inverted credit.

The Problems of the Foreign Tax Credit System Regarding Local Income Taxes, and the Remedial Measures

The Problems of the Foreign Tax Credit System Regarding Local Income Taxes, and the Remedial Measures

Free-Riding in Tax Credits for Home Insulation in France: An Econometric Assessment Using Panel Data

Abstract This econometric study assesses the efficiency of the income tax credit system introduced in France in 2005 on investment decisions for household retrofits, focusing on insulation measures. A logit model with random individual effects is estimated using an unbalanced panel of 23,879 households surveyed over the period 2002–2011. An estimation in difference is performed to identify the impact of the policy. The tax credit is found to have had no significant effect during the first two years, suggesting a latency period related to inertia in households' investment decisions, possibly due to the complexity of the tax credit scheme. The tax credit had an increasing, significant positive effect from 2007 to 2010, before slightly decreasing in 2011. This is in line with changes in the tax credit rates, suggesting a correlation with the level of subsidy. Defined as the situation in which the subsidized household would have invested even in the absence of the subsidy, free-ridership progressively decreased over the period, was lower for insulation of opaque surfaces (roofs, walls, etc.) than for insulation of windows and depended on individual characteristics. The estimated average proportion of free-riders varies between 40% and 85% after 2006. In addition, we assess the potential bias caused by time-varying unobservable variables and conclude that our estimates of the impacts of the policy are conservative.

Free-riding on tax credits for home insulation in France: An econometric assessment using panel data

This econometric study assesses the efficiency of the income tax credit system introduced in France in 2005 on investment decisions for household retrofits, focusing on insulation measures. A logit model with random individual effects is estimated using an unbalanced panel of 23,879 households surveyed over the period 2002–2011. An estimation in difference is performed to identify the impact of the policy. The tax credit is found to have had no significant effect during the first two years, suggesting a latency period related to inertia in households' investment decisions, possibly due to the complexity of the tax credit scheme. The tax credit had an increasing, significant positive effect from 2007 to 2010, before slightly decreasing in 2011. This is in line with changes in the tax credit rates, suggesting a correlation with the level of subsidy. Defined as the situation in which the subsidized household would have invested even in the absence of the subsidy, free-ridership progressively decreased over the period, was lower for insulation of opaque surfaces (roofs, walls, etc.) than for insulation of windows and depended on individual characteristics. The estimated average proportion of free-riders varies between 40% and 85% after 2006. In addition, we assess the potential bias caused by time-varying unobservable variables and conclude that our estimates of the impacts of the policy are conservative.

Strategic Trade Policy through the Tax System

AbstractIf conventional instruments of strategic trade policy are unavailable, the system of foreign profit taxation and transfer price guidelines may serve as surrogate policy instruments. In this paper, I consider a model where firms from two countries compete with each other on a market in a third country. Both firms have affiliates in the third country where (part of) the production takes place. I analyse optimal policy choices of the firms' residence countries aiming at strategically manipulating the competitiveness of their firms. I show that, first, countries prefer the tax exemption system over the tax credit system if there is no intra‐firm trade. Second, if the headquarters provide inputs for production in the affiliate, countries prefer the tax exemption system if the transfer price for these inputs is close to the headquarters' variable cost and if the residence country's tax rate is high. However, if transfer prices are high and the residence country's tax rate is low, I show that the tax credit system is an optimal tax policy choice for both countries. From a policy perspective, the view that the tax exemption system is generally the best policy response if domestic firms' competitiveness is a policy goal has to be qualified.

Universal Credit: the impact of monthly payments on low income households

Universal Credit will radically change the UK's system of welfare benefits and tax credits for people of working age. Universal Credit will be paid on a monthly, rather than a fortnightly, basis. This article examines the evidence for the widespread concern that moving to a monthly payment system will be detrimental for low income households and reviews the government's proposals for providing claimants with budgeting support. The conclusion is drawn that, for some claimants, monthly payment of Universal Credit is likely to make money management easier, but for low income households whose current preferences and habits are to budget on a weekly or fortnightly basis, monthly payment of Universal Credit risks undermining the money management strategies which they find effective.

The introduction of the exemption system for foreign profits and its effects on international acquisitions – the UK and Japan regaining international tax competitiveness?

Purpose – Both, the UK and Japan abolished the tax credit system for foreign source dividends in 2009 in favour of the exemption system. With the move towards a dividend exemption system the governments intended to enhance the international tax competitiveness of their countries. The purpose of this paper is to evaluate the implications of substituting the credit system for the exemption system in the UK and Japan on cross-border transaction prices when competing for international acquisitions. Design/methodology/approach – The paper uses an economic model under certainty to analyse the changes in cross-border marginal purchase and seller prices as a result of the introduction of the newly introduced dividend exemption system. Findings – Shifting to an exemption system has ambiguous effects on the ability to compete for foreign acquisitions: investors from both countries are able to pay higher prices in the course of acquisitions, but while investors from the UK become more competitive, the relative competitive position for Japanese investors hardly changes and remains relatively constrained, independent of the form of double taxation relief. Thus the author verifies that the international tax regime is not the only determinant influencing the competitive position, ranking second to, e.g., the interaction with international tax rate differentials. Originality/value – The international tax reforms in UK and Japan in 2009 offer a unique opportunity to study the impact of international tax policy on the international tax competitiveness of multinational firms in the course of foreign acquisitions. Evidence from this paper is not exclusively applicable to the UK and Japan setting. The observed effects shed new light on the intensified debate in the USA of changing the international tax system by analysing the impact on the bidding situation in international acquisitions in a real-world transition scenario.

Renewable Energy and the Neighbors

Small wind turbines and rooftop solar panels are a highly attractive energy option, capable of generating clean, renewable power without the need for transmission lines across vast stretches of rural land. State and federal incentive programs have made these devices increasingly affordable for landowners in recent years, generating an unprecedented level of interest in “distributed” renewable energy. Unfortunately, small wind turbines and solar panels are often far less attractive in the eyes of neighbors, who fear that the systems will erode neighborhood aesthetics and property values. Despite aggressive state and federal programs aimed at promoting renewable energy systems, land use controls at the local level often discourage landowners from installing the devices. To combat this problem, statutes in a growing number of states invalidate local restrictions on distributed renewable energy. These broad preemptive statutes overcome neighborhood barriers, but they also suppress local participation in land use regulation and ignore community-specific issues and concerns. This article analyzes conflicts between states and communities over land use laws that restrict distributed renewable energy. Framing these conflicts as clashes over scarce “entitlements” to regulate, the article explores the possibility of using liability rule-like approaches to more efficiently allocate these entitlements between states and local governments. Based on the analysis, the article advocates a scheme that would offer “Green Community Tax Credits” to landowners in communities that voluntarily accommodate distributed renewable energy in their land use controls. The tax credit system would strengthen incentives for communities to allow distributed renewable energy but would permit each community to weigh its own unique costs and decide the issue, promoting more flexible and efficient policymaking.

Will Tax Credit Increase Housing Supply? Experience from U.S. and Prospect for Australia

While the world went through rapid urbanization in the last half century, house prices in many densely populated metropolitan regions are becoming increasingly unaffordable. As a result, many families turn to rental housing. However, the high rents in some markets also place significant burdens on low-income households. Thus, a lot of housing policies and strategies have been introduced by national and local governments to subsidize low-income families to improve their rental housing affordability. The low-income housing tax credit program (LIHTC) in the USA and the national rental affordability scheme (NRAS) in Australia are such examples. Both policies aim to increase supply of affordable rental housing for low-income families. LIHTC finances the development of affordable rental housing through a tax credit system, whereas NRAS provides an annual tax-free incentive for investors to purchase new affordable dwellings and rent them at 20% below market rents to low-income families. LIHTC has been implemented in US for more than a quarter century since 1986, while NARS has relatively short history since 2008. However, whether these programs will increase the long-term housing supply, or will they simply “crowd out” other type of affordable rental housing remains an open question.This paper first studies the long-term impact of LIHTC on housing supply, using the property level LIHTC data from 1986 to 2011, as well as other housing subsidy and housing supply data, including non-LIHTC rental subsidy programs, housing vouchers, housing permits, etc. An empirical linear OLS model is estimated to find the long-run sensitivity of housing supply to LIHTC program, controlling for other supply/demand variables. We find LIHTC has strong positive effect on overall housing supply.Then we compare LIHTC to NRAS program and try to forecast the effectiveness of implementing NARS for increasing affordable rental housing supply, with limited historical data. Similar results show that NRAS has fully compensated for traditional public rental units decline. The comparative study is important because it makes it possible to evaluate the effectiveness of such different approaches, and would enable decision makers to put the tax payers’ money for better use. The research results will also be useful for national and local governments when designing low-income housing subsidy programs.

U.S. Versus Sweden: The Effect of Alternative In-Work Tax Credit Policies on Labour Supply of Single Mothers

An essential difference between the design of the Swedish and the US in-work tax credit systems relates to their functional forms. Where the US earned income tax credit (EITC) is phased out and favours low and medium earnings, the Swedish system is not phased out and offers 17 and 7 per cent tax credit for low and medium low incomes and a lump-sum tax deduction equal to approximately 2300 USD for medium and higher incomes.The purpose of this paper is to evaluate the efficiency and distributional effects of these two alternative tax credit designs. We pay particular attention to labour market exclusion; i.e. individuals within as well as outside the labour force are included in the analysis. To highlight the importance of the joint effects from the tax and the benefit systems it appears particular relevant to analyse the labour supply behaviour of single mothers. To this end, we estimate a structural random utility model of labour supply and welfare participation. The model accounts for heterogeneity in consumption-leisure preferences as well as for heterogeneity and constraints in job opportunities.The results of the evaluation show that the Swedish system without phase-out generates substantial larger labour supply responses than the US version of the tax credit. Due to increased labour supply and decline in welfare participation we find that the Swedish reform is self-financing for single mothers, whereas a 10 per cent deficit follows from the adapted EITC version used in this study. However, where income inequality rises modestly under the Swedish tax credit system, the US version with phase-out leads to a significant reduction in the income inequality.

Price Elasticities of Charitable Giving across Donation Sectors in Canada: Is the Tax Incentive Effective?

The effectiveness of tax incentives on charitable donation expenditures in Canada is explored, and the analysis is extended to compare the effectiveness across different donation sectors. Price elasticities are estimated with data from the 2007 Canada Survey of Giving, Volunteering and Participating. Results suggest that specific charitable sectors are affected differently by Canada’s tax credit system. The findings have implications for public policy.

Expanding Choice through Defined Contributions: Overcoming a Non-Participatory Health Care Economy

The fate of the Patient Protection and Affordable Care Act of 2010 is uncertain. Much of the opposition is grounded in popular hostility to expansive federal control over individuals' health care decision-making. But the new law reinforces existing third-party payment, primarily through employers and government programs. This financing already restricts personal choice of health plans and coverage options. Private employers, managed care executives, and public officials make the key spending decisions in health care. Unlike consumers in other sectors of the economy, individuals are mostly passive spectators. Normal market dynamics do not exist, and consumer choice is frustrated. Curiously, public programs, such as the Federal Employees Health Benefits Program (FEHBP), the Medicare Advantage Program, and the Medicare Part D Drug program, are the main exceptions to the norm. In these programs, individuals control the flow of dollars over the purchase of health plans. In crucial areas such as access to care and benefits, cost control, quality, and patient satisfaction, these programs have a strong record. By realigning health reform with the primacy of personal choice, and building on the experience of these programs, policymakers can expand consumer control through defined-contribution financing. Specifically, Congress can replace the existing tax regime for commercial private health insurance with a national tax credit system, provide generous financial assistance for the poor, and transform Medicare into a "premium support" program.