Tax Incidence Research Articles

Who Benefits from State Corporate Tax Cuts? A Local Labor Market Approach with Heterogeneous Firms: Reply

In Suárez Serrato and Zidar (2016), we estimate the incidence of state corporate taxes. Malgouyres, Mayer, and Mazet-Sonilhac (2023) highlight two errors, ignoring effects on firm composition and characterizing capital costs inconsistently. This reply corrects the structural model and corresponding incidence estimates. The incidence results are similar to the originally reported estimates and the confidence intervals widen for some estimates. In the corrected structural model, the firm owner incidence share estimate changes by 1.6 percentage points relative to the original version (i.e., 38.1 percent versus 36.5 percent). The worker share estimate is 35.0 percent. Landowners bear the remaining 26.8 percent. (JEL H22, H25, H32, H71, R23, R51)

Shift or Pivot? Market Entry and Exit With Linear Supply and Demand Curves

Textbooks commonly misrepresent the effects of market entry and exit by consumers and producers as parallel shifts of linear market demand and supply curves. Such portrayals are inconsistent with the underlying premise that a market-level curve is the horizontal summation of individual-level curves. A more accurate depiction is a pivot: entry flattens (and exit steepens) a market-level curve. Reconceiving the effects of entry and exit as pivoting, rather than shifting, the curve has important implications for own-price elasticities, consumer surplus, producer surplus, the incidence of taxation, and the competitive market adjustment to a long run equilibrium. JEL codes: A22, B40, D01

Do competitive markets encourage tax aggressiveness?

We investigate whether industry-level product market competition and firm-level market leadership affect firms' tax aggressiveness. Studying competition from both current market participants and potential entrants, and using a market share-based measure of market leadership, we find that firms facing higher competition from current market participants engage in more tax aggressiveness. We further find that market-following firms — rather than market‑leading firms — engage in relatively more tax aggressiveness within these higher competition settings. Our results contrast with most political and regulatory anecdotes that target market‑leading firms for aggressive tax behaviors, and add to the ongoing policy debates on tax incidence. Our main findings and additional tests are consistent with the view that market‑leading firms in imperfectively competitive product markets are able to pass on tax costs to customers, while market-following firms in crowded industries are pressured to engage in tax aggressiveness because they cannot pass on tax costs.

Relationship between Income Tax and Profitability of the Hotel Sector in Kenya

Taxation is a global economic phenomenon of paramount importance, serving as a shared fiscal responsibility between citizens and governments. This comprehensive review explores the intricate relationship between income tax and profitability, focusing on corporate tax, Pay as You Earn (PAYE), withholding tax, and their impact on businesses, particularly star-rated hotels in Kenya. The theoretical frameworks of Tax Incidence Theory and Labor Market Theory provide valuable insights into understanding the complex interplay between taxation and profitability in the hospitality industry. Drawing from empirical literature, this review explores studies from Nigeria, Kenya, and Romania, shedding light on the complex relationship between income tax and profitability. It discusses how corporate tax rates, employee income taxes, and other tax-related factors can influence a company's financial performance. This study concludes that there is an intricate negative relationship between income tax and profitability in the context of Kenyan star-rated hotels, considering corporate tax, PAYE, and their implications. The study aims to contribute to effective tax policies that support the industry's sustainable growth in Kenya and potentially other similar industries globally.

Tax incidence for menthol cigarettes by race: Evidence from Nielsen Homescan data

We use Nielsen Homescan data to examine whether the incidence of cigarette taxes on menthol products varies with race. We find that taxes are shifted at significantly lower rates to Black smokers of menthol cigarettes than any other smokers. One possible explanation is that the industry targets price promotions to Black menthol smokers because they tend to be more responsive to cigarette prices relative to other smokers. We find evidence that Black smokers receive significantly more price discounts for menthol products than white menthol smokers. Our findings indicate that increasing cigarette taxes would effectively reduce menthol smoking among Black Americans because tax pass-through rate for Black menthol smokers is still substantially above zero.

Tax Incidence Analysis in Zambia

Tax Incidence Analysis in Zambia

Kantian–Nashian interaction and petty tax corruption in developing countries

PurposeThis paper attempts to develop a simple, static model of tax administration that is capable of explaining the widespread collusive petty tax administration corruption observed in developing countries.Design/methodology/approachThis paper utilizes a positivist research framework and adopts a theoretical method of analysis, although secondary data will also be mentioned to support theoretical arguments whenever it is appropriate to do so.FindingsA high rate of collusive tax corruption is inevitable in developing countries.Research limitations/implicationsThe model is static and needs to be extended into a dynamic model.Practical implicationsTraditional enforcement tools such as higher audits or a higher penalty regime against tax evasion do not work. Tax simplification can lessen the incidence of tax corruption.Social implicationsFighting tax corruption requires significant changes in the attitudes of taxpayers and tax auditors.Originality/valueThis paper combines the literature on Kantian economics and tax compliance in an innovative fashion.

Tax wedges, financial frictions and misallocation

We revisit the classical result that in a closed economy the incidence of corporate taxes on labor is approximately zero. We consider a rich general equilibrium framework, where agents differ in the level of their wealth as well as in their managerial and working ability. Potential entrepreneurs go through all the key decisions affected by corporate tax changes: the choice of (i) occupation, (ii) organizational form, (iii) investment, and (iv) financing structure. We allow both for the presence of financial frictions and the traditional tax advantage of debt over corporate equity, which jointly generate misallocation of capital and talent. In this environment we characterize the effects of increasing corporate taxes both analytically and for a calibrated version of the model. We show that this tax increase reallocates production from C corporations to pass-through businesses. Since, due to distorted prices, the latter have higher capital-labor ratios, this reallocation generates a reduction in labor productivity and wages. Furthermore, the corporate tax increase induces some C corporations to reorganize as pass-throughs, which implies more restricted access to external funds and thus a socially inefficient downsizing of production in these firms. Finally, the tax increase causes further misallocation of talent by inducing agents with low wealth relative to their managerial talent to switch from entrepreneurship to being workers, while the reverse happens for agents with higher wealth and lower managerial skills. Overall, we find that both labor and capital bear a large share of the corporate tax incidence, while entrepreneurs are net beneficiaries of the tax change.

Domestic Savings and International Capital Flows in the EU

This paper uses new statistical estimates to test for effects of economic integration in Europe on international capital mobility. In a world of perfect capital mobility, one should experience little or not statistically significant relationship between the amount of domestic savings and domestic investment. Alternatively, under less-than perfect capital international mobility, diverse portfolio preferences and country-specific transactions costs would create impediments for long-term capital flows. This would result in direct connection between any changes (increases) in domestic savings and domestic investment. According to empirical results of a similar empirical study by Feldstein and Horioka (1980) for developed countries (including some of current EU members included in this investigation), there were portfolio preferences and institutional rigidities, which resulted in almost equal corresponding differences in domestic investment rates driven by domestic savings rates among major industrial countries.
 The current study tests for capital mobility in the EU Member States (2010-2020) discussing compatibility of findings with previous evidence found in the literature (Feldstein and Horioka 1980). It also addresses the optimal national savings policy, tax incidence and concludes on capital formation in the EU.

Taxable Capacities: How has Economic Transformation and Resource Dependency Work?

Purpose: This paper examines the impact of economic transformation and natural resource dependency on the taxable capacity of SSA countries. Theoretical framework: This paper is based on positive tax theories which is concerned with who bears the burden of various taxes, and the incidence of a particular tax. Design/Methodology/Approach: This paper employed Stochastic Tax Frontier Analysis (STFA) using annual data for thirty-three SSA countries for eighteen years that range from 2002-2019. Findings: Empirical findings from this study indicate that most Middle-Income Countries (for example, Botswana, Cameroun, Cote d’ Ivoire, Lesotho etc) dominate the High Tax Performance category. This further confirm the positive and significant influence of real per capita income in the taxable capacity model of the SSA region as well as that of the MICs. However, exception to this trend is those of countries with relatively low per capita income (for example, Mali and Burundi) but operating near their tax potential, and with appreciable tax effort. The reason that may be attributed for this exception may be the rise of mining activities (though, this may not be enough to raise 30% of the countries’ hydrocarbon revenue) by large companies. Research, Practical & Social implications: The construction and analysis of tax revenue performance matrix for the sub-Saharan Africa by this study have provided relevant information for sub-Saharan Africa countries in preparing for substantial fiscal independence and would give clear indications of the revenue productivity of existing taxes that may lessen the anxiety of the apparent fiscal deficit challenges faced by most SSA countries, and this will further provide policy directions for future tax reforms in the various countries of the region. Originality/Value: The originality of this study lies in its investigation of the taxable capacities; how has economic transformation and resource dependency works. Additionally, the study highlights the relevance of tackling regulatory issues to ensure the safe and effective use of taxable capacities.

Trickle-down revisited

Abstract:In this paper I discuss what can be learned about ‘trickle-down’ ideas from recent empirical evidence on tax incidence, or the effect of tax policies on the distribution of welfare. I underscore three lessons. First, recent research suggests that business income taxes affect the earnings of workers, but these effects largely derive from taxing rents and rent-sharing, highlighting the importance of these channels for determining the ultimate incidence. Second, when workers are affected by these taxes, the burden is not borne equally by all workers, but predominantly by those at the top of the earnings distribution. Third, across different tax policies that statutorily affect the rich, the burden is largely borne by the rich, but heterogeneity in responses across tax incentives and taxpayers provides context for incidence analyses. Throughout, I discuss the value of analysing heterogeneous responses, particularly how tax incidence depends on labour markets, product markets, and tax systems.

Spatial Microsimulation of Carbon Tax Incidence: An Application to Washington State

Spatial Microsimulation of Carbon Tax Incidence: An Application to Washington State

The impact of intrafirm incentive conflicts on the interplay between tax incidence and economic efficiency

AbstractWe study how corporate taxation interacts with intrafirm incentive conflicts between shareholders and managers and how this interaction impacts the firm's economic decisions and outcomes. In our model, investment under asymmetric information facilitates entrenchment and rent extraction by the privately informed manager. We show that when the future investment payoff is exogenous, a corporate tax cut increases managerial rents, reduces pre‐tax investment profitability, increases the firm's optimal investment hurdle rate, and reduces investment. When the manager can exert upfront project development effort to increase the expected investment payoff, a tax rate reduction not only encourages more effort but also leads the firm to increase the investment hurdle rate to curtail rents. In equilibrium, a lower tax rate always benefits the manager, but the sensitivity of the project's return to the manager's effort determines whether the firm will increase or decrease investment in response to a tax cut, and whether the firm's resulting pre‐tax profit will increase or decrease. Overall, our study shows that intrafirm incentive conflicts can be an important factor in the interplay between tax incidence and economic efficiency, two central themes in corporate tax policy debates.

Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms: Comment

Suárez Serrato and Zidar (2016) identify state corporate tax incidence in a spatial equilibrium model with imperfectly mobile firms. Their identification argument rests on comparative statics omitting a channel implied by their model: the link between common determinants of a location’s attractiveness and the average idiosyncratic productivity of firms choosing that location. This compositional margin causes the labor demand elasticity to be independent from the product demand elasticity, impeding the identification of incidence from the four estimated reduced-form effects. Assigning consensual values to the unidentified parameters, we find that the incidence share borne by firm owners is closer to 25 percent than 40 percent. (JEL H22, H25, H32, H71, R23, R51)

Pass-through and tax incidence in differentiated product markets

The role of demand curvature in determining firm behavior in symmetric oligopolistic product markets is well-understood. We consider the empirically relevant discrete choice differentiated product demand and point to two forces that drive curvature in logit demand: the impact of outside-good spending on the consumer’s indirect utility and the heterogeneity in this response across consumers. We use the canonical example of the ready-to-eat cereal market (Nevo, 2000) to contrast elasticity and curvature estimates across several workhorse models. We illustrate that the log-concave Multinomial Logit and Nested Logit demands yield significantly biased curvature estimates. In contrast, a Mixed Logit specification generates a wider range of curvatures, including curvatures larger than one. These results are of immediate relevance to the robust assessment of tax incidence and the pass-through of cost savings, such as from a horizontal merger, in differentiated product markets.

FÉ E TRIBUTO_UMA ANÁLISE DO INSTITUTO DA IMUNIDADE TRIBUTÁRIA E DAS OBRIGAÇÕES VINCULADAS ÀS PREBENDAS

This article results from the documentary analysis of the normative precepts that govern the differentiated tax regime that grants religious organizations immunity from the incidence of taxes and exemption from government contributions. Taking as a premise that the basic characteristic of tax immunity is the fact that it is unconditional and subjective, we sought to observe the practical implications of the incidence of this fundamental guarantee supported by the Constitution of the Federative Republic of Brazil of 1988. Extending the analysis of the differentiated tax regime to which religious organizations submit, observations were made of the governmental mechanism for taxing the prebenda (stipend) and the risk of a possible mischaracterization of its nature. As a result, the inviolability of the tax immunity of religious organizations was proved, which makes it possible to recover all types of taxes improperly collected, in the last five years, and the contributory nature of the prebenda was verified, which, as a result of the religious vocation, aims at the propagation of the faith, which is instituted for the benefit not of the ecclesiastical legal entity, but, rather, of the community served by the religious temple, which is the basis of the main foundations of the immutable character of the tax immunity of temples of any cult.

Evaluating the Theory and Implementation of Land Value Taxation

Land value tax, a variant of the property tax, is a recurrent tax levied upon unimproved land value, which does not include the improvements of the land. In practice, a land value tax can be imposed on both land and its improvements with a higher tax rate on land. The motivation behind adapting a land value tax is to mitigate the negative impacts brought forth by traditional property taxation, which imposes the same tax rate on land and improvements. These negative impacts include distortion of economic activities and undesirable distribution of the tax incidence. In contrast, land value taxation has stronger theoretical support. It takes the unearned revenue of the landowners, promotes economic activities without incurring inefficiency, and redistributes income and wealth to promote equality. However, the theoretical case does not entirely reflect the challenges of implementation and political resistance that land value taxation encounter.

Corporate Taxation

This article reviews economic research on business taxation, with a focus on corporate income taxation. We discuss what this research can contribute to current debates about corporate tax policy and where existing research is incomplete or inconclusive, so that clarification is needed. The issues we discuss include the incidence of the corporate income tax, its effect on investment and economic growth, the problem of international tax avoidance, and the role of corporate taxes in economic crises, including the current debate about taxes on windfall profits.

Wage response to corporate income taxes: A meta‐regression analysis

AbstractThe wage elasticity to corporate income tax (CIT) is an essential parameter for assessing tax policy reforms. This paper applies meta‐regression analysis to quantitatively review the growing empirical tax incidence literature that indicates a substantial shift of the tax burden onto employees. While most studies report a large wage‐reducing effect of the CIT, our findings suggest that estimates with positive values are published less often than they should. After accounting for the bias, we find no significant average association between wage rates and corporate taxation. We document that the tax variable, econometric method, type of tax variation, and underlying time and country coverage of studies drive the heterogeneity among reported effects. The implied best‐practice estimates suggest that the tax elasticity of wages is systematically larger for emerging countries and smaller when tax changes at the subnational level are exploited.

DISTRIBUTIONAL INCIDENCE OF INDIRECT TAXATION: AN EMPIRICAL REVIEW

In this article, we reviewed the published Research works on indirect tax incidence, which describes the way of distributing indirect tax burden among households, and the purpose of this review is to identify the distributional impact of the burden of indirect tax on different groups, such as income groups, expenditure groups, commodity groups, and demographic groups, etc. The process of systematic review has been implemented in order to search, select, appraise, synthesize, and report the findings of previous studies. A government's revenue depends on several sources. Among them, indirect taxes are used as a major form of collecting government revenue, especially in developing countries. We observed major findings that there is a regressive type picture of the overall indirect tax system, which mainly impacts the vulnerable groups in a country. Indirect taxes will be paid by every household irrespective of income level. Even though the incidence theory of taxation describes the burden of indirect tax distributed among producers and consumers as per the elasticity of demand and supply, that would not happen practically. The imposition of indirect taxes leads to an increase in raw materials, then increase the cost of production and ultimately increases the price level of the country, which creates cost-push inflation. The entire portion of the indirect tax will be shifted to the end consumer. The increase in indirect taxes will be led to a rise in the tax burden on households. The burden of indirect taxation highly damages the living standards of the low-income groups in a country, especially due to the consumption tax. Households that are earning low incomes will be paid a relatively higher portion of indirect taxes than the households that have higher incomes. Past researchers have emphasized the importance of eliminating the consumption taxes on essential and most sensitive commodities, which are mostly consumed by the poor income groups.