Tax Policy Changes Research Articles

Corporate tax reforms and tax-motivated profit shifting: evidence from the EU

This paper examines whether the profit-shifting trend in Europe during 2003–2013 can be explained by tax policy changes. Consistent with prior literature, we find that affiliates’ profits are sensitive to tax rate changes. However, we document that tax base–broadening reforms have mitigated the incentives for both inward and outward profit shifting. In particular, we find that anti-avoidance rules prevent multinational companies from shifting profits out of their foreign affiliates, whereas other tax base–broadening rules, such as restrictions on the deductibility of tax losses or on group tax relief, reduce the incentives for multinational companies to shift profits into foreign affiliates. Furthermore, we find evidence of a downward trend in profit shifting across European countries, especially when the tax enforcement is stricter. Overall, these results suggest that broader tax bases and stricter tax enforcement have successfully curbed this particular tax strategy.

Tobacco industry pricing undermines tobacco tax policy: A tale from Bangladesh

The effectiveness of tax increase in reducing tobacco use depends on the extent to which the industry passes on the tax to consumers. Evidence suggests that tobacco industry may absorb or raise the price more than the tax increase depending on the price segment of tobacco products. In this paper, we examined the industry's pricing strategy by price segment of the cigarette market in Bangladesh by observing the deviation between the market retail prices (MRP) of cigarettes faced by consumers and government recommended retail prices (RRP) used as tax base in a four-tiered ad valorem tax structure. The RRPs by brands were collected from government sources. The MRPs by brands were collected by the International Tobacco Control Bangladesh Wave 3 Survey 2011–12 and Wave 4 Survey 2014–15. Applying linear regression to the deviation of MRP from RRP by price tiers, we found MRPs were higher than RRPs for higher-price brands allowing extra profit margin from the high end while lowering the relative price of and expanding demand for cheaper brands. Bangladesh cigarette industry adopted a differential pricing strategy that undermined the intended effect of tax policy change in reducing cigarette consumption and improving public health. This pricing strategy was supported by the tiered excise tax structure which should be replaced with a uniform specific excise system. In the face of growing cigarette affordability, it is crucial that the specific tax be increased routinely by an amount that induces cigarette price increases large enough to make cigarettes less affordable over time.

TAXPAYER’S BEHAVIOR IN THE CHANGING TAX POLICY

The aim of the article is to identify the factors determining the taxpayer?s behavior, to evaluate Lithuanian taxpayer?s behavior by changing tax policy of VAT. The article investigates whether the increase of VAT burden in Lithuania has a significant impact on taxpayer?s behavior, encouraging them to voluntarily pay taxes or avoid tax liabilities. The research period is from Q1 2000 - Q4 2016. The study uses VAT gap data. Research methods: correlation analysis, vector auto regression (VAR) model. The use of correlation analysis allows to establish the relationship between tax rates and changes in taxpayer?s behavior, while the vector auto regressive method allows to investigate taxpayer?s behavioral responses to the changes of tax rate. According to the responses of the impulse functions, the response of taxpayer?s behavior (tax avoidance) to the changes in tax policy is determined. The investigation showed, that in the short term, the increased tax burden may lead to decrease of VAT gap, in the medium term an increase in tax burden on VAT may increase the level of tax avoidance in the country.

Global Capital and Local Assets: House Prices, Quantities, and Elasticities

Interconnected capital markets allow mobile global capital to flow into immobile local assets. This paper examines how foreign demand affects U.S. housing markets, and uses this demand shock to estimate local price elasticities of supply. Other countries introduced foreign-buyer taxes meant to deter Chinese housing investment beginning in 2011. We first show house prices grew 8 percentage points more in U.S. zipcodes with high foreign-born Chinese populations after 2011, subsequently reversing with the onset of the U.S.–China trade war. Second, we use international tax policy changes as a U.S. housing demand shock and estimate local house price and quantity elasticities with respect to international capital. We find that a 1% increase in instrumented foreign capital raises house prices at the zip code level by 0.27%, and housing supply by 0.004%. Finally, we use the two elasticities to construct new local house price elasticities of supply for the largest 100 CBSAs. These supply elasticities average 0.1 and vary between 0.02 and 0.7, suggesting that local housing markets are inelastic in the short run and exhibit substantial spatial heterogeneity.

Traditional Internet Economy, Blockchain Economy and The Optimal Tax Policy

This model explores how the optimal tax policy changes by the government on traditional internet economy and the blockchain economy when political regime changed. Also, our model compares how social welfare varies before and after the blockchain economy or the government involves. After analyzing, we get several interesting findings, first, without government, blockchain economy makes no influences on the monopoly ability of traditional internet economy and social welfare maximized in Nash equilibrium. Second, when government implements tax policy on economies, a loss in social welfare exists if the government is more self-interest (less democratic). Third, pure blockchain economy only exists when the democratic level of a government is very low and the technical cost of running a traditional internet platform is very high. This is because, in the mixed economy, the independence of more-dictatorial government with traditional internet economy leads to non-subsidy tax policy for traditional internet platform with high technology costs, thus the participation constraint for traditional internet platform cannot be satisfied. And without traditional internet economy, more self-interested government prefers to implement exploitative tax policy on citizens in pure blockchain economy, thus leads to a loss in social welfare. Finally, we find that even though maximization of social welfare cannot be realized in pure blockchain economy, with government's tax policy, social welfare is generally higher after blockchain economy was introduced.

Tax Elasticity Estimates for Capital Stocks in Canada

The paper provides estimates of the long-run, tax-adjusted, user cost elasticity of capital (UCE) in a small open economy, exploiting three sources of variation in Canadian tax policy: across provinces, industries, and years. Estimates of the UCE with Canadian data are less prone to the endogeneity problems arising from the effects of tax policy changes on the interest rate or on the price of capital equipment. Reductions in the federal corporate income tax rate during the early 2000s for service industries but not for manufacturing, which already benefited from a preferential tax rate, contribute to the identification of the UCE. To capture the long-run relationship between the capital stock and the user cost of capital, an error correction model (ECM) is estimated. Supplementary results are obtained from a distributed lag model in first differences (DLM). With the ECM, our baseline UCE for machinery and equipment (M&E) is -1.312. The corresponding semi-elasticity of the stock of M&E with respect to the METR is about -0.2, suggesting, for example, that a 5 percentage point reduction in the METR, say from 15 to 10 percent, would in the long run generate an increase of 1.0 percent in the stock of M&E. The UCE for non-residential construction is statistically insignificantly different from zero.

IMPERATIVES OF STRATEGIC FINANCIAL MANAGEMENT OF TERRITORIES IN THE CONDITIONS OF ASYMMETRIC DEVELOPMENT

Introduction. The defined strategic vector of Ukraine in the direction of forming partnership with the European communities requires from the regions the increased attention concerning a substantiation of financial policy through effective management. In the system of effective management, it is important for the financial authority to assess the capacity of the territory, outline the components to the ability to form a revenue base, take into account changes in budget and tax policies and strengthen the motivational component for development and development. Goal. Therefore, special attention needs to be paid to the development of a strategic model of financial management, which will move towards sustainable development, while systematically forming a resource, acting and responding through an efficiency multiplier. Method (methodology). Methods of theoretical generalization, grouping and systematization, logical generalization, graphic, modelling were used in the scientific search of the problem, which allowed to identify the problem and substantiate the results of the research in the system. Results. The strategic principles of financial management of territories in the conditions of budget decentralization are defined, which consist in definition of components of level of efficiency of financial management, construction of algorithm of collaboration in territorial management system and development of system strategy of financial management. Conclusions. A system strategy of financial management in the conditions of decentralization has been formed, which envisages outlining the structural guidelines of budget efficiency, determining the priority tasks of management for the respective region, taking into account its socio-economic specifics. It is substantiated that the strategy works through the components of the level of efficiency of financial management, principles and imperatives of continuous development, which ultimately provides a synergistic effect. It is determined that the symmetry of collaboration, parity, coherence and optimization provide a multiplier of budget efficiency.

Priority directions of tax policy change in the information sphere

Priority directions of tax policy change in the information sphere

Inequalities in middle-income Europe and Central Asia: A tale of three studies

This paper focuses on how questions of inequalities in middle-income countries in Europe and Central Asia are dealt with in three recent studies: the EBRD’s “Transition Report 2016–17”; the World Bank’s 2018 study “Toward a new social contract: Taking on distributional tensions in Europe and Central Asia”; and UNDP’s “Regional human development report 2016. Progress at risk: Inequalities and human development in Eastern Europe, Turkey, and Central Asia.” While the three studies differ in terms of objectives, conceptual frameworks, country coverage, data and indicators, and policy recommendations, they also share important commonalities — particularly in terms of creating “regional” inequality narratives for transition economies, reconciling official data with common perceptions of inequalities in the region; improving data quality, quantity and availability, and changes in tax and social policies.

Inequalities in middle-income Europe and Central Asia: A tale of three studies

This paper focuses on how questions of inequalities in middle-income countries in Europe and Central Asia are dealt with in three recent studies: the EBRD’s “Transition Report 2016–17”; the World Bank’s 2018 study “Toward a new social contract: Taking on distributional tensions in Europe and Central Asia”; and UNDP’s “Regional human development report 2016. Progress at risk: Inequalities and human development in Eastern Europe, Turkey, and Central Asia.” While the three studies differ in terms of objectives, conceptual frameworks, country coverage, data and indicators, and policy recommendations, they also share important commonalities — particularly in terms of creating “regional” inequality narratives for transition economies, reconciling official data with common perceptions of inequalities in the region; improving data quality, quantity and availability, and changes in tax and social policies.

Assessing the Impact of Tax Reforms on the Long-Term Sustainability of Public Finances

The article is devoted to the methodological aspects of assessing the impact of tax reforms on the sustainability of public finances. The low impact of numerous tax changes during 2003–2017 in Ukraine aimed at reducing the tax burden, improving the investment climate, led to a narrowing of fiscal space, a decrease in government investment, and a curtailment of enterprise investment. The problem of assessing the direct and indirect effects of tax reforms in terms of changes in tax rates and tax base, tax revenue structure, tax benefits, on public finances and the finances of economic entities in the short and long term remains insufficiently investigated. The task is to identify the relationship between tax policy changes that are taking place within the framework of tax reforms, the economic behavior of economic entities, and their impact on the sustainability of public finances.
 The article identifies trends in the development of taxation in the EU, which create the conditions for activation of the factors of development of innovative, competitive economy, in particular, the reduction of corporate income tax rates and personal income tax while expanding the tax base, increasing consumption taxes on property. The methodological support of the assessment of tax reforms of EU countries is summarized and the conclusion is made about the possibility of its application in Ukraine. Changes in the share of various taxes in the total amount of tax revenues are analyzed. The reasons and the financial consequences of the tax effects in Ukraine established in the EU countries were found to be associated with a reduction in corporate income tax rates and a compulsory social contribution (lower rates do not reduce tax revenues and increase the budgetary income in the medium term). Indicators and models that can be used to assess tax reforms aimed at improving tax competitiveness (reducing tax rates), as well as reforms to ensure economic growth (redistribution of tax burden and tax incentives - tax innovation benefits) are identified. It is proposed to supplement this list with indicators: the level of investment of the institutional sectors of the economy, the investment rate, the level of profitability, the global innovation index.
 Proposals on adjusting the directions of tax development in Ukraine have been elaborated.

Heterogenous wealth effects of minimum unit price on purchase of alcohol: Evidence using scanner data.

One of the key arguments given to oppose the “sin taxes” is that they are regressive in nature and place disproportionately higher cost on the poor thereby reducing their net wealth. The response to a reduction in net wealth attributed to tax can potentially have significant effects through an increase in alcohol purchase by heavy drinkers reinforcing or even offsetting the direct price or substitution effect of these taxes in reducing alcohol consumption. Comparatively little is known empirically about the net wealth effect associated with changes in alcohol tax policy, and this study aims to help fill this gap in the literature. In this study we aim to estimate how the wealth effects of introducing a minimum unit price (MUP) of A$2.00 per standard drink vary over the distribution (quantiles) of alcohol consumers. The data used in this study is a longitudinal panel of 1,395 households’ daily alcohol purchases (scanner data) recorded over a full year. Our analysis involves (i) quantile regression to estimate income elasticity over the distribution of consumption, and (ii) using these elasticities to estimate the potential wealth effects of a hypothetical change in alcohol prices from introducing an MUP policy. We control for consumer demographic characteristics, alcohol product prices and prices of close substitutes, and quarterly seasonal effects. We find that the estimated wealth effect from increasing the price of alcohol under a MUP policy is not significant at any point over the distribution of alcohol consumers. The policy increases per capita tax impact by less than A$5.00 per week for light/moderate consumers (50th—80th quantile) and decreases their daily per capita alcohol consumption by less than 0.02 standard drinks. Wealth effects attributable to an MUP policy are likely to be negligible. Substitution effects of the policy dominate the wealth effects in generating key health related outcomes such as reductions in alcohol consumption.

Informality, innovation, and aggregate productivity growth

AbstractThis paper investigates how the costs of innovation in the formal sector temper or magnify the impacts of traditional policy levers such as taxation on sectoral choice. I embed a decision whether to operate formally or informally into a richer, general equilibrium model. Formal firms are subject to taxation, but they can improve their productivity through process innovation. Informal firms can potentially avoid taxation, and their productivity is determined by productivity growth in the formal sector. I find that changing tax rates from 50% to 60% decreases formal‐sector participation by 20.9%; however, this percentage falls by 10% when the cost of innovation is lower in the formal sector. The model also illustrates how changes in tax policy affect total factor productivity growth by limiting both the number of formal‐sector firms and the intensity of innovation. These results indicate a potential mechanism to induce firms to operate formally or mitigate harmful impacts of necessary tax changes.

Technological Change and Countries' Tax Policy Design

We investigate whether technological changes predict tax policy changes in thirty-four OECD countries between 1996 and 2016. In addition to the statutory tax rate, we construct two new country-level indexes, one capturing a country’s tax-related investment incentives and one capturing its anti–tax avoidance rules. We show that after technological changes, countries tighten their anti–tax avoidance rules and reduce investment tax incentives. Technological changes do not contribute to the race to the bottom of statutory tax rates. Rather, cross-sectional tests show that smaller countries deviate from this general trend and apply less stringent anti–tax avoidance rules. In the competition for firms’ mobile capital, smaller countries thus appear to create indirect investment incentives by opting for less salient tax policy tools (i.e., less strict anti–tax avoidance rules). In contrast, countries facing high (tax) competition tighten their anti–tax avoidance rules to prevent the erosion of tax revenues.

Convergence in Income Inequality Across Australian States and Territories

This paper investigates stochastic convergence in income inequality across Australian states and territories since the end of World War II by utilising the LM and RALS-LM unit root tests that allow for endogenously determined structural breaks. We find that income inequality for Australia’s capital city—the Australain Capital Territoy—converges to a stable steady-state when we account for endogenously determined trend-breaks. The null hypothesis of a unit root is rejected when utilising the two-break unit root test for New South Wales, Northern Territory, Queensland, South Australia, Tasmania and Western Australia indicating that income inequalities in these states converge to a stable steady-state when accounting for multiple structural breaks. In contrast, the state of Victoria consistently shows evidence of divergence regardless of the number of endogenously determined structural breaks. Structural changes in income inequality across states and territories may be linked to the mining boom, the transition from manufacturing to a service-based economy, changes in government welfare, and favourable changes in tax policies and superannuation.

Impacts of Neighbors on Local Tax Rates: A Space–Time Dynamic Panel Data Analysis

This article explores the spatiotemporal pattern in the local tax system of Extremadura, a region in the southwest of Spain. Using the most relevant tax in terms of revenues at the local level in Spain, the property tax on urban land, a very general space–time dynamic panel data model with spatial and time period fixed effects, has been estimated to explore different types of strategic tax interactions among local governments. The empirical analysis uses a balanced panel database covering 383 municipalities from Extremadura for the period 2006–2015 to estimate the reaction of tax policy in a given municipality to its own past, to changes in tax policy in other municipalities, and to (direct and indirect) changes in some control variables. The results show that nominal local property tax rates are affected by tax policy inertia from the own municipality and neighboring municipalities and two observed municipal characteristics, whereas effective tax rates depend on tax policy inertia from the own municipality and property tax policies from neighboring municipalities and five observed municipal characteristics. In both cases, local spillover effects are not significant at standard statistical levels.

The Private Income Tax Shock Premium

This paper investigates the asset pricing implications of tax policy changes. News about tax cuts decreases future tax revenues and increases future consumer demand and output. Using cross-sectional variation in industry exposure to structurally identified tax news, I develop a factor mimicking private income tax shocks. I construct an investment strategy, which generates annualized risk-adjusted returns of 5.16 % over the Fama-French 3-factor model. I rationalize the finding by arguing that firms with more elastic demands bear higher consumption risk, which works through a wealth effect.

Macroeconomic implications of modeling the Internal Revenue Code in a heterogeneous-agent framework

Tax policy analysis in heterogeneous-agent models typically involves the use of smooth tax functions to approximate complex present tax law and proposed reforms. In this paper, we explore the extent to which the tax detail omitted under this conventional approach has macroeconomic implications relevant for policy analysis. To do this, we develop an alternative approach by embedding an internal tax calculator into a large-scale overlapping generations model that, while conditioning on idiosyncratic household characteristics, explicitly models key provisions in the Internal Revenue Code applied to labor income. We find that for a debt-constant steady state analysis of a given tax policy change, both approaches generate similar policy-induced patterns of macroeconomic activity despite variation in the underlying patterns of household tax-preferred consumption and labor supply behavior. However, this variation in underlying behavior is associated with significant quantitative and qualitative differences in macroeconomic aggregates along a debt-financed transition path immediately following a policy change. Consequentially, although the use of unconditional smooth tax functions may be a reasonable modeling simplification for steady state analysis of tax policy, caution should be taken for their use in transition path analysis within heterogeneous-agent models.

The Mortgage Interest Deduction: Causes of Fluctuations in a Procyclical Tax Expenditure

The mortgage interest deduction (MID) is the largest source of US federal homeowner support. I estimate that this tax expenditure fluctuated between 0.2 and 0.9 percent of gross domestic product (GDP) over the past five decades. About half of these fluctuations were caused by changes in tax policy, rather than changes in the housing market. Fluctuations in the MID tax expenditure do not tend to move with homeownership rates; instead, they are procyclical, meaning the MID may exacerbate business cycles.

U.S. Investment Since the Tax Cuts and Jobs Act of 2017

There is no consensus on how strongly the Tax Cuts and Jobs Act (TCJA) has stimulated U.S. private fixed investment. Some argue that the business tax provisions spurred investment by cutting the cost of capital. Others see the TCJA primarily as a windfall for shareholders. We find that U.S. business investment since 2017 has grown strongly compared to pre-TCJA forecasts and that the overriding factor driving it has been the strength of expected aggregate demand. Investment has, so far, fallen short of predictions based on the postwar relation with tax cuts. Model simulations and firm-level data suggest that much of this weaker response reflects a lower sensitivity of investment to tax policy changes in the current environment of greater corporate market power. Economic policy uncertainty in 2018 played a relatively small role in dampening investment growth.