Tax Rate Adjustments Research Articles

Smoothing Shocks and Balancing Budgets in a Currency Union

We study simple fiscal rules for stabilizing the government debt level in response to asymmetric demand shocks in a country that belongs to a currency union. We compare debt stabilization through tax rate adjustments with debt stabilization through expenditure changes. While rapid and flexible adjustment of public expenditure might seem institutionally or informationally infeasible, we discuss one concrete way in which this might be implemented: setting salaries of public employees, and social transfers, in an alternative unit of account, and delegating the valuation of this numeration to an independent fiscal authority. Using a sticky-price DSGE matching model of a small open economy in a currency union, we compare the business cycle implications of several different fiscal rules that all achieve the same reduction in the standard deviation of the public debt. In our simulations, compared with rules that adjust tax rates, a rule that stabilizes the budget by adjusting public salaries and transfers reduces fluctuations in consumption, employment, and private and public after-tax real wages, thus bringing the market economy closer to the social planner’s solution.

Fiscal Illusion from Property Reassessment? An Empirical Test of the Residual View

The textbook view of the real property tax is that the tax rate is simply a residual, determined by dividing the revenue to be raised from the property tax by the taxable base of assessed values. As such, tax rate adjustment is automatic and changes in assessed values are neutral with respect to property tax revenue. Critics often claim that policymakers do not fully reduce the tax rate in response to increasing assessed values, allowing them to effectively raise revenue without raising tax rates. Using data from Virginia cities and counties between 2000 and 2008, this paper estimates the response of levy growth rates to property reassessment by taking advantage of a policy environment that offers a natural experiment in the execution of mass reappraisals. A timing lag in the implementation of updated property assessments to be used in setting the tax rate further allows the study to disentangle assessed value growth from other forms of economic growth, including the market values of property. Our findings provide partial support for the fiscal illusion critique, as mass reappraisals per se provide cover for politicians to raise levy growth rates; however, overall the growth in aggregate taxable assessed values is largely irrelevant.

What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks

We reassess the driving forces behind the recent decline of corporate tax rates in Europe. Using data for up to 32 countries from 1983 to 2006, we analyze the role of economic and financial openness as well as tax competition while allowing for dynamic adjustment to shocks and period-specific as well as country-specific effects. While openness does not seem to be systematically related to corporate tax rates, our findings suggest that countries compete over statutory tax rates. In contrast, we do not find competition over effective marginal rates. While the short-run impact of tax competition on corporate tax rates seems to be modest, the interplay of tax competition and a sluggish adjustment of tax rates over time implies that permanent shocks to individual countries have substantial long-run effects on equilibrium tax levels in all countries.

Cohort-Specific Measures of Lifetime Social Security Taxes and Benefits

This paper develops estimates of lifetime money's worth and redistributional outcomes under the Old Age and Survivors Insurance (OASI) program for all past, present, and future birth cohorts affected by the program through the cohort born in 2100. The estimates presented in this study incorporate a comprehensive accounting of all OASI taxes and benefits and blend historical administrative data with tax and benefit projections. Projected taxes and benefits are consistent with the detailed intermediate economic and demographic assumptions underlying the 2002 Trustees Report and extended beyond the Trustees Report projection period using an approach consistent with the Trustees Report assumptions. The qualitative conclusions reached in this analysis should be unaffected by the relatively minor changes in key economic and demographic assumptions that characterize subsequent Trustees Reports. Because the present OASI program is projected to be in long-run deficit, estimates are also developed in this paper under two stylized alternative policies that bring the program into long-run financial balance over the Trustees Report projection period and beyond. The first alternative policy achieves long-run financial balance through a series of proportional benefit award adjustments and the second alternative policy through a series of payroll tax rate adjustments. Lifetime outcomes for each birth cohort are examined both from the perspective of cohort members, indicating the extent to which each cohort has received or can expect to receive their money's worth from the program, and from the perspective of the program, indicating the extent of redistribution across the cohorts. These estimates update similar estimates presented in Leimer (1994) and, under certain assumptions, can be used to calculate the legacy debt associated with program transfers to early cohorts. This paper - describes the methods used in this analysis to develop program and cohort outcomes under the alternative policies, - describes and analyzes these program and cohort outcomes, - compares these outcomes with analogous outcomes in the most comparable previous analyses and identifies key differences in assumptions and approaches underlying the different outcomes, and - presents some concluding observations.

An experimental investigation of wage taxation and unemployment in closed and open economies

We investigate experimentally the economic effects of wage taxation to finance unemployment benefits for a closed economy and an international economy. The main findings are the following. (i) There is clear evidence of a vicious circle in the dynamic interaction between the wage tax and unemployment. (ii) Employment is boosted by budget deficits but subsequent tax rate adjustments to balance the budget lead to employment levels substantially lower than theoretically predicted. (iii) A sales risk for producers due to price uncertainty on output markets appears to cause a downward pressure on factor employment. For labor the wage tax exacerbates this adverse effect.

Fiscal Discipline and Asymmetric Adjustment of Revenues and Expenditures: Local Government Responses to Shocks in Denmark

Fiscal discipline is a concern because of possible spending and deficit bias in fiscal and political institutions. This study investigates adjustments under fiscal federalism, concentrating on decentralized government in Denmark and allowing for a comparison with neighbors Norway and Sweden and with similar analyses of U.S. states. Fiscal adjustments are investigated as responses to shocks measured as deviations from budgeted current surplus. The econometric results show that local governments respond by compensating adjustment of tax rates and expenditures. The shock responses tend to be asymmetric. Positive shocks hardly affect the income tax rate, whereas negative shocks induce higher tax rates. The authors interpret the asymmetry as the result of spending pressure due to redistributive politics and show that political characteristics are important for tax determination. They conclude that the Danish design of controlling the local public sector avoids fiscal imbalances but allows a bias toward expansion.

Public Provision of Pensions: The Doug Purvis Memorial Lecture

Public provision of pensions to the general population comes in a variety of forms. Systems designed around a benefit formula and systems designed around a contribution rate differ in their economic implications and differ in their political settings. Canada has a defined benefit system with fallback automatic adjustment of tax rates. This paper contrasts the Canadian system with the Chilean (privatized) defined contribution system which has received a great deal of attention worldwide. The paper discusses three approaches to cutting benefits if the currently anticipated tax increase is larger than is desired.

Capital Gains and After‐Tax Internal Rates of Return

AbstractNet present value models are constructed by discounting the after‐tax cash flows of a challenging investment by the after‐tax internal rates of return (IRRs) of a defending investment. After‐tax IRRs calculated for a defending investment are shown to depend on the defender's capital gains and allowable depreciation. The often recommended adjustment to the before‐tax IRRs of one minus the marginal income tax rate is not generally applicable. Failure to correctly adjust the discount rates (the defender's IRRs) for taxes may result in incorrect inferences from comparative static models and incorrect investment valuations from empirical models. Tax rate adjustments for farmland, stocks, and bonds are shown to be different and to have varied over time.

A Residential Interest Deduction as a Potential Approach to Taxing Imputed Rent

The non-taxation of homeowners' imputed net rental income is recognized as inequitable and non-neutral, but is often felt to be unavoidable for practical reasons. It may be feasible, however, to tax imputed rental income indirectly if tax deductions were allowed for the residential interest expenses of both tenants and homeowners with the offsetting personal income tax rate adjustments made in a distributionally neutral fashion. That such a provision would improve tax equity is demonstrated with Canadian data. Allowing such deductions in Canada would facilitate homebuying by admitting many more families to the market although homeownership would ultimately become more expensive.

The investment tax credit: Conflict and accounting error

Despite diversity of opinion within the accounting profession, substantial authoritative support exists for two conflicting alternatives for disposition of the investment tax credit. These are the flow-through to income method and the deferral method. The alternatives are, however, inconsistent with the notions of exchange transaction and realization in contemporary accounting theory. The authors suggest an approach based on the following considerations: the credit is an investment allowance; it arises from an exchange transaction between the government and the entity; the credit should be reflected as an adjustment associated with income tax obligation; it should not be commingled; and it should not influence depreciation policy, tax expense for shareholder reporting; or be confused as an adjustment of tax rates.