Tax Cuts Research Articles

Is Revenue-Neutrality of Carbon Taxation Possible in Practice? Two Case Studies From Canada

Despite the potential economic efficiency and political economy benefits of revenue-neutrality, a deeper question remains about the feasibility of revenue-neutrality in practice. Revenue-neutrality is relatively simple to implement in an economic model, as counterfactuals are clearly defined. However, it is less clear in practice when a government actually implements a carbon tax what income tax or transfer levels would have been if the carbon tax had not been implemented. This paper aims to provide some perspective on this issue by presenting two examples of carbon taxes and revenue recycling implemented in Canada: the British Columbia revenue-neutral carbon tax (a carbon tax with offsetting tax cuts) and the Canadian federal government’s Fuel Charge and Climate Action incentive refundable tax credit (a carbon tax and dividend). Is revenue-neutrality possible in a practical sense with either of these types of policies, or is it at best a marketing gimmick to help sell carbon taxes to voters?

Tax Cut: Suatu Studi Literatur

This study aims to determine the factors associated with the tax cut. The literature review method was used in this study. The data in this study were obtained from sciencedirect.com. The results showed that several variables were influential and influenced by tax cuts, as well as variables that had no effect. The results show that the tax cut has no significant effect on median weekly earnings, has a significant effect on merger activity, shareholder wealth, distribution economic activity, aggregate welfare, R&D investment, domestic market shares and exports, investment, employment, profit, tax revenue, gross domestic product, inbound tourism, and travel receipts, as well as labor supply and consumption decisions. There are several conflicting research results due to differences in the place of study and the time period of the study which resulted in different conclusions. The tax cut is also influenced by government debt. An overview of further research is also presented here.

Evolution in the Tax Code: (Almost) the End of Homeowner Tax Savings?

The federal government has long promoted homeownership through various provisions in the U.S. income tax code. The Tax Cuts and Jobs Act of 2017 (TCJA) renewed interest and debate about the treatment of housing via the tax code, particularly with respect to the mortgage interest deduction and the limitation on deductions for state and local taxes. We document the extent that the TCJA magnifies the long-standing anti-mortgage debt bias in the tax code. Our analysis reveals that ongoing discussions about the effects of eliminating the mortgage interest deduction are largely irrelevant because most households no longer benefit from this deduction. We also demonstrate how the limitations on the deduction of state and local taxes alters the costs associated with homeownership across geographic areas, and we provide detailed calculations of the average and marginal tax rates at which housing related expenses are deducted. Finally, we calculate how the major tax benefit of owner-occupied housing — the nontaxation of net implicit rental income varies across income groups and locations.

Tax Rates Variations And Its Effect On Individual Tax Payers A Research Focussed On Salaried Class People In India

The structure and financing of a tax rate variations are grave to achieving economic growth. Tax rate cuts may encourage individuals to figure, save, and invest, but if the tax cuts aren't financed by immediate spending cuts they're going to likely also end in an increased federal deficit, which within the long-term will reduce national saving and lift interest rates. Even though, they reallocate resources diagonally toward their highest-value economic use, resulting in improved efficiency and potentially raising the overall size of the economy. The sample for the study happens to be 384 number of taxpayers. The cogent way of statistical analysis is made via ANOVA and T-test. This paper makes an attempt to explore the tax rate changes and its effect on individual tax payers.

Revisiting the determinants of carbon emissions for Turkey: the role of construction sector.

This study intends to consider the link among carbon dioxide (CO2) emissions, real GDP, energy usage, trade, financial development, and construction sector activities in Turkey within the Environmental Kuznets Curve (EKC) framework by employing an autoregressive distributed lag (ARDL) bounds test procedure. The analysis includes the period of 1970-2015 in keeping with available data. The findings of the study show that an increase in construction sector activities plays a positive role in CO2 emissions. The results also argue that CO2 emissions have risen statistically significantly with real GDP and energy usage increases. Furthermore, trade openness positively contributes to carbon emissions, while financial development does not explain environmental pollution in the long term. The study also reveals that the EKC hypothesis holds for Turkey both in the long term and short term. The long-run findings of the study are supported through robustness analysis by applying the dynamic ordinary least square (DOLS), the fully modified ordinary least square (FMOLS), and the canonical cointegrating regression (CCR) methods. The study suggests that the government should take action against environmental deterioration with efficient policies that save energy and reduce emissions regarding the construction and residential sectors' activities, such as providing financial support and tax cuts for relevant companies.

State Individual Income Tax Conformity in Practice: Evidence from the Tax Cuts & Jobs Act

Nearly every state incorporates the federal tax code into its individual income tax system. This widespread incorporation has many supporters and has been justified on the basis that it is necessary in order for states to have a simple and efficient tax system. This article explores the practical effects and dynamics of state tax conformity through a novel examination of how states that tightly conformed to the federal individual income tax responded to the recently enacted Tax Cuts and Jobs Act which, for these states, would have both raised state taxes and changed the distribution of state tax burdens. The study reinforces concerns raised in both the theoretical and economic literature regarding conformity’s enhancement of revenue volatility and likelihood of distorting state legislative decision-making, while adding several new observations of conformity’s impact. The study illustrates that conformity imposes significant time constraints on state legislatures, conformity causes not only revenue shocks, but tax policy shocks, and even where state revenue is kept constant following a federal change, conformity may cause relative state tax burdens to change. Based on these findings, the article concludes by offering suggestions for how states can move past the idea that extensive conformity with the federal tax code is required and instead design an individual income tax system that is simple, efficient, and enhances a citizen’s relationship to the state.

The attention trap: Rational inattention, inequality, and fiscal policy

I show that if it is costly for households to process information about asset returns, a model with ex-ante identical households features persistent inequality. The steady state has a two-agent structure, with inequality maintained by a complementarity between attention and wealth: wealthy households have stronger incentives to pay attention to asset choices, and so earn higher returns than asset-poor households. Fiscal expansions are less powerful in this model than in a standard model with heterogeneous discount factors, because when an expansion causes poor households to start saving, they also increase their attention. They therefore earn higher interest rates, and so save even more, smoothing the windfall from the policy over a longer time period. I provide evidence for this increase in attention using cross-state variation in uncertainty about savings interest rates in the aftermath of the 2017 Tax Cuts and Jobs Act in the US. The effects of fiscal policy therefore depend not just on the existence of inequality, but also on the cause of that inequality.

Measuring corporate tax rate and tax base avoidance of U.S. Domestic and U.S. multinational firms

We develop an approach based on publicly available data to decompose and quantify tax avoidance into two separate components: tax rate avoidance and tax base avoidance. Our measures are based on the average statutory tax rate, which accounts for the statutory tax rates across all transactions of a firm. We illustrate and validate our measures using simulation data, the Tax Reform Act of 1986, the Tax Cuts and Jobs Act of 2017, changes in tax rate avoidance and tax base avoidance across time, bonus depreciation time periods, several sample splits of U.S. multinational and domestic firms, differences across industries, and firms operating in tax haven locations. The measures allow regulators and researchers to gain insights into these two conceptually different tax avoidance strategies.

Does resource dependence cushion the impact of thin capitalization rules on foreign investment inflows? Evidence from Africa

Due both to the prevarication of political elites and to tax evasion and capital flight by multinationals, Africa's development has not benefited as much from the continent's mineral resources as it should have. The thin capitalization rules (TCRs) implemented by several mineral resources rich-countries to alleviate this concern seem contradictory to the attractiveness policies in force, which results in multiple tax cuts, especially when the shocks observed on mineral prices lead to budgetary pressures. This study investigates how changes in mineral prices and rents affect the impact of TCRs on foreign direct investment (FDI) inflows into Africa. The analyzes are carried out through the two-step systems GMM, using data from 33 cross-countries between 2005 and 2018. Consistently with the assembled literature, the study finds that TCRs harm FDI inflows. This study provides an additional contribution by showing a breaking point from which the rise in the price and the rent of minerals becomes a shield that fully absorbs the negative impact of the TCRs on multinationals' decision to settle. The price and the resulting breaking income are such that the negative impact of the TCRs on FDI inflows is overcompensated when, on average for the sample, the mineral price index goes beyond 103.54 or whenever the mineral rent exceeds 28.32% of the host country's GDP. These results are robust when controlling for the efficiency of government in revenue mobilization. The study shows that resource-rich countries in Africa should consider promoting the non-extractive sector's attractiveness in anticipation of the depletion of mineral reserves.

Economic Opportunity & Resilience: Opportunity Zones & Equity

The Tax Cuts and Jobs Act provided the most comprehensive update to the tax code in two decades. Born of it was the federal opportunity zone legislation that facilitates economic development in historically distressed areas by offering tax incentives. But does this “catalyst of economic growth” provide the needed relief and opportunity to the communities which it’s aimed to serve? This piece is an analysis of opportunity zones—the good, the bad, and the yet to be defined and their effect on actually curbing (or accelerating) gentrification. By considering the TCJA in general, this work evaluates stipulations regarding “Opportunity Zones,” and the concept of geographically-targeted tax policy. First, an analogization of supply-side tax policy and place-based incentivization programs; following the analysis of supply-side economics and its influence on a rising inequality; and a two-fold assessment of the factors most germane to this analysis: a historical overview of the ideological, legislative, and social factors most pivotal to the passage of TCJA, reforms are shown to have culminated not only in sky-high levels of wealth and income inequality in the U.S., but also an increasing distance and isolation between the wealthy ‘investor class’ targeted by ‘Opportunity Zone’ legislation, and the economically-distressed communities which such tax-based legislative incentives were designed to bring relief. Notably, this work will consider the impact of such legislation upon poor areas, both in terms of the apparent impact it has had upon local development and with respect to the phenomenon known as gentrification. After examining the shortfalls of the legislation, this paper offers recommendations on a robust, comprehensive response toward equitable growth for the communities intended to be served.

Design and simulation of a secondary resource recycling system: A case study of lead-acid batteries

The recycling of secondary resources is complicated as consumers, recyclers and governments are all involved in this process. In developing countries, compared to legal recyclers, illegal recyclers not only have cost advantages but also create serious pollution. Inappropriate management policies may cause disorder in the recycling market or inefficient fiscal management. This paper takes China’s lead-acid batteries (LABs) from 2000 to 2015 as an example to construct a model of a secondary resource recovery system based on heterogeneous groups and analyzes the environmental and economic impacts of used LAB recycling. By simulating the implementation of different tax cuts, subsidies and regulatory policies by the government in each year, we observe the overall environmental impact of the recycling industry. This study finds that when the total amount of government expenditures is limited, the optimal policy combination emphasizes tax reduction and subsidy policies during the growth period of the recycling industry and uses more funds for supervision in the mature period. Under the balance of fiscal revenues and expenditures, the optimal policy combination can reduce the number of illegal recycling companies and waste lead emissions from the recycling market by 97.9% and 45.8%, respectively. Compared to research conducted using mathematical models and system dynamics models, this result is more in line with the actual situation, and the content is more intuitive. The government needs to adopt different policy combinations in different periods according to the state of the recycling market so that the recycling of secondary resources can achieve the optimal effect.

Identifying the Heterogeneous Impact of Highly Anticipated Events: Evidence from the Tax Cuts and Jobs Act

We develop a method for estimating the stock market impact of aggregate events. Based on using data on both stock and options prices, our technique accounts for two important sources of bias present in traditional methods. First, our method takes into account market anticipation, without the need for information on specific firm characteristics. Many event studies only measure a fraction of an event's full value effect, so the measured market reaction at event resolution can be misleading, particularly in the case of a very high degree of market anticipation. Second, our method is robust to the possibility of the event being good news for some firms and bad for others, without prior specification of this heterogeneity. We apply the method to the passage of the Tax Cuts and Jobs Act (TCJA), which exhibits both anticipation and heterogeneity. We estimate the market anticipated the probability of passage to be as high as 95% 30 days before the event. The full value impact of the TCJA is found to be 12.36%, compared to 0.68% when market anticipation is ignored. The firm-level impact of the TCJA is considerably heterogeneous, with large and innovative firms with high growth prospects being the largest winners.

The Tax Cut and Jobs Act (2017) as a Driver of Pension Derisking: A Comprehensive Examination

Corporate defined-benefit (DB) pension sponsors in the US are increasingly on a path of “derisking” – by moving pension assets away from equities and towards fixed-income securities that better match the obligations, or by transferring obligations off their balance sheets entirely, via settlements with insurance companies or lump-sum payouts to beneficiaries. In this study, we examine whether the Tax Cut and Jobs Act of 2017 (“TCJA”) served as a driver of pension derisking. Examining behavior in the window between the TCJA’s announcement and its lower tax rate going into effect, we document that sponsors with stronger incentives to derisk their pensions tend to contribute more into their plans in that window, while deductions can still be taken at the higher tax rate – specifically, sponsors expecting large and uncertain contribution requirements for pensions in the future, facing high regulatory costs to maintaining plans, and with competing demands on cash flows. Examining behavior after the TCJA goes into effect, we document that the firms with the largest TCJA-triggered contributions also engage in more derisking subsequently, both by shifting asset allocations and by transferring obligations to other parties. In sum, our findings point to the TCJA having acted as a trigger for what could be a fundamental reorganization of the DB pension landscape in the US.

The Impact of the Opportunity Zone Program on the Residential Real Estate Market

The U.S. Tax Cuts and Jobs Act of 2017 introduced opportunity zones (OZs). This program provides tax benefits for real estate investments in designated census tracts, with the goal of fostering economic development in distressed neighborhoods. We examine the impact of OZs on residential real estate by exploiting two datasets: a proprietary real estate dataset and census-tract demographics data between 2010 and 2019. Our real estate dataset comprises 36.1 million residential transactions spanning all 50 U.S. states. We first investigate the OZ selection process by examining which census-tract characteristics were taken into account. As expected, we find that tracts with higher poverty and unemployment rates and lower income levels were more likely to be selected. However, we find evidence that tracts with a higher average real estate price were also more likely to be selected. We then analyze the impact of the OZ program by comparing key real estate metrics (price and transaction volume) before and after the program launch. We find that the OZ program increased real estate prices by 4.03-6.13%, but we do not observe a significant effect on the transaction volume. Finally, we examine the moderating effects of census tract characteristics on the impact of the OZ program. Interestingly, we show that the price increase is driven by the higher end of the OZ market. Our findings thus question the overall societal and economic benefits of the program.

Summaries of Articles

Summaries of Articles

The Effect of Statutory Tax Rates on the CEO Performance-Turnover Relation

Although theory predicts boards should replace underperforming CEOs, archival studies estimate that CEO underperformance has only a modest effect on turnover. Higher corporate statutory tax rates increase the sharing of corporate profits and losses with the government, partially shielding shareholders from the consequences of CEO underperformance and reducing the expected net after-tax benefits of improved performance by a replacement CEO. Thus, we predict higher corporate tax rates contribute to the modest documented effect of CEO performance on turnover. We use the corporate tax rate reduction enacted by the Tax Cuts and Jobs Act to test our prediction. Consistent with expectations, we estimate an increased sensitivity of CEO turnover to firm performance after the Tax Cuts and Job Act. Furthermore, this increased sensitivity is stronger among firms for which the expected net after-tax benefits of replacing an underperforming CEO are greatest either because the firms expect a larger gross benefit from the rate reduction or have lower estimated replacement costs. Our study extends the literature on CEO turnover and suggests statutory tax rates are an important friction in the CEO replacement decision.

The U.S. tax-transfer system and low-income households: Savings, labor supply, and household formation

Eligibility and benefits for anti-poverty income transfers in the U.S. are based on both the means and the household characteristics of applicants, such as their filing status, living arrangement, and marital status. In this paper we develop a dynamic structural model to study the effects of the U.S. tax-transfer system on the decisions of non-college-educated workers with children. In our model workers face uninsurable idiosyncratic risks and make decisions on savings, labor supply, living arrangement, and marital status. We find that the U.S. anti-poverty policy distorts the cohabitation/marriage decision of single mothers, providing incentives to cohabit. We also find quantitatively important effects on savings, and on the labor supply of husbands and wives. Namely, the model yields a U-shaped relationship between the earnings of one spouse and the labor supply of the other spouse, a result that we also find in the data. We show that these U-shaped relationships stem in part from the current design of anti-poverty income programs, and that the introduction of an EITC deduction on the earnings of secondary earners—as proposed in the 21st Century Worker Tax Cut Act—would increase the employment rate of the spouses of workers earning between $15K and $35K, especially of female spouses.

How Did We End Up with This Budget and This US International Tax System? A Brief History of the Proposed Predecessor Tax Reforms to the Tax Cuts and Jobs Act of 2017

This article examines the history and implications of US international tax reform in the 21st century, with particular reference to revenue raising, deficits and the Tax Cuts and Jobs Act of 2017.

Thanks, neighbor! Stock market experience around significant European tax cuts

PurposeThis paper analyzes the effect of corporate tax cuts on the competitiveness of the tax-cutting countries and neighbor countries.Design/methodology/approachThis study utilizes four significant corporate tax reforms among the OECD countries in Europe that offer a one-time tax cut of 6% or more. The short-term event study approach examines the stock index reactions for both the tax-cutting countries and the other countries. Multivariate fixed-effect regressions are employed to study the cross-sectional variations in the non-tax-cut countries.FindingsThis paper finds positive excess returns for Slovakia and Germany around the tax-cut passage. Multivariate analysis of stock market reactions of the non-tax-cutting countries reveals some evidence supporting both the positive spillover effect and the negative competitive loss effect. More advanced countries are more likely to experience higher abnormal returns, while higher tax countries are more likely to suffer lower abnormal returns. Other factors identified that might have influenced the effect of a foreign tax cut include the existing trade flows with the tax-cutting countries, whether the country has a common currency and the export orientation of the economy.Research limitations/implicationsThe findings are subject to sample-size issues. The lack of results for the other two countries is due to complicating events, as suggested by the further investigation of concurrent news events around the event days.Practical implicationsThe simultaneous analysis of the reform countries and the other countries in the region suggests that policymakers need to consider the relative positioning of their country vs the other countries in terms of economic development and current tax burdens when determining the optimal policy for their country or to respond to the tax policy changes in the other countries.Originality/valueThis study offers empirical evidence regarding the effect of corporate tax changes on competitiveness through the lens of stock markets' reactions, which depend on the net results of the spillover gain vs the competitive loss.

Real estate taxes and home value: Evidence from TCJA

We examine the impact of changes in the federal tax treatment of owner-occupied housing stemming from the implementation of the Tax Cuts and Jobs Act (TCJA) in January 2018 on local housing markets. Using county-level house price information and IRS tax data, we find that, holding everything else the same, capping the federal tax deduction of state and local taxes at $10,000 has caused the growth rate of home value to decline by an annualized 0.9 percentage point, or 18 percent, in areas where real estate taxes as shares of taxable income exceeded the national median. The results are robust when controlling for other changes in the tax reform. The areas with a high real estate tax burden also suffered from reductions in market liquidity after the reform. Fewer houses were transacted either in absolute numbers or as shares of total listings and houses stayed on the market longer before being sold. Importantly, we find that the housing market slowdown was accompanied by declines in local construction employment growth as well as multi-family building permits. Furthermore, on net more people moved out of these areas after the reform. Finally, we show that the act has already had political consequences. In the 2018 midterm Senate elections, more voters voted for Democratic candidates in areas with high real estate tax burden than they did for Republican candidates.