Income Tax Treatment Research Articles

Social Security Annuities and Transfers: Distributional and Tax Implications

The division of security (OASI) benefits into an annuity portion and a transfer portion has been well documented. I have discussed this issue extensively in previous work (1987b, 1988, 1990, and forthcoming), as did Burkhauser and Warlick (1981) previously. My methodology is quite similar to theirs. The annuity portion is defined as the benefit level the worker would receive on the basis of his(her) contributions into the security system (OASI) if the system were actuarially fair. The calculation is based on the worker's estimated earnings history and actual security tax rates. The transfer portion is the difference between the actual security benefit received and the actuarially fair annuity equivalent. As we shall see below, it has been uniformly positive for workers who have retired on or before 1983. Burkhauser and Warlick examined the relative proportions of annuity versus transfer benefits by income class and age group. However, they did not conduct an extensive examination of the overall distributional implications of who security transfer portion. Nor did they consider the tax implications of treating security transfers as taxable income. These are the principal subjects of the current paper. With regard to the distributional implications of the security system, I will examine three sets of issue. First, I will consider what the relative magnitudes have been of the annuity and transfer portions of security income. Since I have data for three years, a related issue is whether the relative proportions have changed over time. Second, I will consider how the security transfer portion has affected the distribution of income among elderly households. Has the transfer component been neutral or has it tended to redistribute income toward lower income elderly households? Third, the same issue can be addressed with regard to household wealth, in which security benefit flows are transformed (capitalized) into wealth equivalents. From a policy point of view, the more interesting issue is how do the total taxes of the elderly change with the removal of the exclusion of security transfer income -- that is, when security transfer income is treated as taxable income. There are three questions of interest. First, how does the change in tax treatment affect the post-tax distribution of income. Second, which groups of elderly are most affected by the change in tax treatment. Third, what is the total change in the magnitude of tax revenues. As a final point of policy interest, I will also consider whether the extra revenues generated by the new tax treatment of security income can serve as a social security capital to reduce the growing wealth gap among age groups in the U.S. As will become apparent in the analysis, the security system has been quite generous to today's elderly, providing them with benefits far in excess of their contributions into the system. Moreover, young families have fared rather poorly over the last several decades in regard to their income and wealth accumulation. I will propose a policy vehicle below, called a social security capital fund, which can serve as an additional source of capital for today's young workers. The source of the funding can potentially come from the extra tax revenues from elderly households. It is thus also of interest to analyze whether the additional tax revenues are large or small relative to the wealth holdings of young households and whether such a fund can make a significant difference in the well-being of younger families.

Tax Evasion, Tax Competition and the Gains From Nondiscrimination: the Case of Interest Taxation in Europe

This paper uses a game-tlieoredc approach to analyse the taxadon of interest income in Europe in the presence of tax evasion. The model allows tis to assess the success of various reform proposals. We argue tbat the tax treatment of nonresidents' interest income plays a crucial role. When decisions on discriminatio n and on withholding tax rates are made noncooperadvely, the outcome is similar to a prisoners' dilemma. All countries discriminate, but in equilihrium internationally mobile portfolio capital evades taxation successfully. In contrast, if all governments did not discriminate, tax competition leads to less tax evasion. The integration of capital markets in Europe has hrought various benefits. At the same time, however, governments struggle to contain tax evasion. International capital flight as an attempt to evade taxes is particularly relevant in the area of taxation of interest income. Banking secrecy laws in some EU countries and low tax rates in small countries like Luxembourg, which hoost its role as financial centre, have led to the effective elimination ofthe taxation of interest income for some investors. The Economist speaks, not surprisingly, about 'The Disappearing Taxpayer' (May 31, 1997). Several proposals have been made in order to overcome this situation.' The European Commission supports the introduction of a minimum tax rate and/ or the status of a community resident. Under the concept of a community resident a country's tax on interest income is independent of the residence of the investor (practically realising the source principle). By contrast, a proposal of the OECD (1977) argues in favour of a maximum withholding tax rate on interest income. None of these proposals has been unanimously accepted since gains and losses from non-coordinated policies differ greatly across member states. The main beneficiary of the present situation is Luxembourg which attracts large amounts of foreign capital, in particular from Germany. The United Kingdom opposes any coordination for political reasons and because tax coordination may also threaten London's role as the leading financial centre in Europe. In contrast, Germany sticks to its traditional bank secrecy law which enables resident investors to evade German taxation by investing abroad.

Family Allowances and Family Policy: the Italian Case

In 1936 Italy adopted a family allowance system which was employment-based and financed by a payroll tax. On time, the system moved in the direction of providing allowances for all families. However, since the early 1980's, a particularly significant trend has been to target family allowances towards low-income families. In more recent times, a fundamental change has been suggested towards a system closely resembling public assistance, giving more room to the income tax treatment of the family. The paper tries to advance arguments in favour of a family policy based on the combination of lump-sum child allowances (not income-tested) with progressive taxation.

Are Consumption Taxes Regressive?

It is often argued that a general consumption tax is necessarily regressive, particularly because households with high incomes typically save relatively more than those with low incomes. This paper uses very simple tax models to examine the combination of income and consumption taxes. It suggests that it is preferable to consider the overall impact of all taxes and transfers rather than relating payments of a single tax to gross income, instead of the relevant tax base. Insofar as savings might be relevant, attention should be given to the income tax treatment of investment income.

Inflation, Real Interest Tax Wedges, and Capital Formation

Inflation magnifies the distorting effects of taxation when the tax treatment of interest income and expense is not fully indexed to inflation. The distortion involves a real interest tax wedge which is the difference between the real before tax interest rate that influences fully taxed investors and the real after tax interest rate that influences savers. Reducing the real tax wedge by eliminating inflation or indexing would stimulate private saving and non-residential investment, but decrease tax receipts and the tax deductions that subsidize home ownership.

Distributional Implications of Introducing a Broad-Based Consumption Tax

As a tax base, 'consumption' is sometimes argued to be less fair than 'income' because the benefits of not taxing capital income accrue to high-income households. We argue that, despite the common perception that consumption taxation eliminates all taxes on capital income, consumption and income taxes actually treat similarly much of what is commonly called capital income. Indeed, relative to an income tax, a consumption tax exempts only the tax on the opportunity cost of capital. In contrast to a pure income tax, a consumption tax replaces capital depreciation with capital expensing. This change eliminates the tax on the opportunity cost of capital, but does not change, relative to the income tax, the tax treatment of capital income arising from a risk premium, inframarginal profit, or luck. Because these components of capital income are more heavily skewed toward the top of the distribution of economic well-being, a consumption tax is more progressive than would be estimated under conventional distributional assumptions. We prepare distribution tables and demonstrate that this modification is quantitatively important.

A hybrid consumption-based direct tax proposed for Bolivia

In 1994 the authors designed a consumption-based direct tax for the government of Bolivia. The proposal combined yield exemption treatment (exemption of interest income and no deduction for interest expense) of individuals with consumed income tax treatment (taxation or deduction of the net proceeds of borrowing and lending, as well as interest income and expense) of business. This article explains why taxation based on cash flow has administrative and economic advantages over a conventional income tax and why the hybrid system proposed is preferable to either pure form of consumption-based tax.

Taxes And The Calculation Of Present Value Of Future Medical Expenses

Abstract No abstract available.

Pride and prejudice: Women, Tax and Citizenship

This paper examines, from a critical perspective, the income tax and national insurance contributions treatment of women in the UK (specifically concentrating on those in traditional domestic relationships of marriage and care) using the concepts of economic citizenship and the public-private divide. This divide is characterized in two ways: first as a divided between the traditional family and the state; and second between the private realm of economic activity and state regulation. The central conclusion is that in the past and in the present the discriminatory treatment of such women has been rationalized in terms of the proper role of the State within a neo-classical political regime. Current policy emphasis on economic citizenship further exacerbates such discrimination.

Income taxes and the marriage decision

Economic incentives have been found to play an important role in the marriage decision in developed and developing countries. However, the way in which the income tax treatment of the family affects these incentives has been routinely ignored. This paper uses time-series data for the United States from 1947 to 1988 to estimate the impact of economic factors - including, for the first time, the tax consequences of marriage - on the aggregate marriage rate. The estimation results indicate that economic factors like income, female wages and education play an important and statistically significant role in the marriage decision. In particular, the tax consequences of marriage clearly affect the marriage decision: when income taxes increase with marriage, the aggregate marriage rate declines. However, the magnitude of this impact is quite small. This result suggests that some individuals respond to tax incentives in their marriage choices, but that for many individuals taxes do not affect these decisions.

Redistributive Effect and Unequal Income Tax Treatment

Redistributive Effect and Unequal Income Tax Treatment

Income Tax Treatment of US Stock Options Plans in Europe

Income Tax Treatment of US Stock Options Plans in Europe

Tax Incentives and Equipment Investment

OVER THE PAST FORTY YEARS, tax treatment of income from capital in general, and income from producer's durable equipment in particular, has been changed in the United States an amazing number of times. Depreciation allowances have been accelerated and then retarded; depreciation methods have ranged from straight line to double-decliningbalance; investment tax credits have been enacted, suspended, reinstated, eliminated, re-enacted, and most recently, repealed again. In addition, both corporate and personal tax rates have moved over a substantial range. All of this tinkering with the tax structure is hard to justify on any economic basis; the long-run attitude of investors would be better served by a stable policy that insures that political risk will not be added to the already considerable uncertainty about future after-tax returns. Why the frequent changes in business taxation have occurred is not clear. In general, the trend in tax rates has been downward, and reaching political consensus on this trend has been an uneven and contentious process. Inflation has at times created serious distortions in effective tax rates, and changes in the tax code may have been aimed at mitigating these effects. Most importantly, various administrations have attempted to use tax stimulus for investment as part of their efforts to fine-tune economic activity through short-term fiscal policy changes.

The preferential income tax treatment of owner‐occupied housing: Who really benefits?

Abstract This article uses a model that includes an explicit measure of net implicit rental income to examine the size and distribution of the tax expenditure to owner‐occupied housing across and within homeowner income classes. The model is derived from 1989 American Housing Survey data. The analysis leads to three major conclusions. First, on net, the inclusion of net implicit income in the measure of homeowner tax savings adds a substantial amount to the estimated tax expenditure given to owner‐occupied housing. Second, the interaction of changes in the standard deduction and in the tax treatment of itemized nonhousing expenses has rendered the mortgage interest deduction worthless for many low‐ and moderate‐income households. Third, although most of the expenditure is distributed to high‐income households, the distributional effects of eliminating the expenditure to owner‐occupied housing depend on the manner in which these savings are distributed.

Comment on James R. Follain, David C. Ling, and Gary A. McGill's “The Preferential income tax treatment of owner‐occupied housing: Who really benefits?”

Comment on James R. Follain, David C. Ling, and Gary A. McGill's “The Preferential income tax treatment of owner‐occupied housing: Who really benefits?”

Comment on James R. Follain, David C. Ling, and Gary A. McGill's “The preferential income tax treatment of owner‐occupied housing: Who really benefits?”

Comment on James R. Follain, David C. Ling, and Gary A. McGill's “The preferential income tax treatment of owner‐occupied housing: Who really benefits?”

THE ROLE OF FEDERAL TAXATION IN THE SUPPLY OF MUNICIPAL BONDS: EVIDENCE FROM MUNICIPAL GOVERNMENTS

This paper considers ways in which federal tax policy affects municipal asset and debt holdings. The tax treatment of municipal bonds and income creates an arbitrage opportunity for communities to issue tax exempt debt and invest in financial assets. I present evidence that suggests the rules in effect prior to 1986 to prevent this activity were not effective. I then develop and estimate a model of municipal bond supply. I find a semi-elasticity of 1.23 of long term debt with respect to the spread between the after tax rate of return and the municipal borrowing rate.

A Tax‐Tax Clientele for Inde‐linked Bonds: A Comment

ABSTRACTThis comment describes the U.S. federal income tax treatment of corporate bonds that are indexed for inflation and argues that these bonds do not have a tax‐tax clientele in the United States.

Analysis of Sexual Bias and Section 72 Changes Affecting the Implicit Rate of Return of Certain Defined Benefit Plans

Analysis of Sexual Bias and [Subsection] 72 Changes Affecting the Implicit Rate of Return of Certain Defined Benefit Plans Abstract In 1986, the Internal Revenue Service instigated new gender neutral mortality tables. These mortality tables are used to determine the amount of certain retirement benefits to be excluded from taxation. This article demonstrates the sex bias inherent in the old gender specific tables by comparing measures of rate of return (ROR). Further, the authors show that the changes in mortality assumptions have effectively raised taxes on both men and women, thus reducing the ROR for both classes of taxpayers. Additionally, the 1986 changes eliminated the lifetime exclusion and thus raised taxes on those taxpayers who outlive their expected lives. A significant demographic characteristic of the United States is the increasing average age of its population. In recent years, concern over the potential insolvency of the Social Security system, the increase in the wage replacement ratio from approximately 60 percent to almost 80 percent, (Palmer, 1989) and a perceived need to encourage savings have brought more attention to the importance of retirement plans. Federal taxation plays a critical role in the motivation of saving for retirement -- particularly in providing for qualified pension plans. Furthermore, federal taxation may still contain elements of sexual bias even though the 1986 changes were designed, in part, to reduce the bias reflected in differing benefit |exclusion' formulae for males and females. After a working career of perhaps 40 years, a retiree might find that the sexual bias that affected his or her entire working career permeates his or her retirement income as well. One of the last places that a citizen should expect to find sexual bias is at the hands of the government and particularly in the exercise of its taxing authority. However, changes in tax laws always create new classes of winners and losers. This article presents an analysis of the effect of two tax law changes made in 1986 upon the retirement income of taxpayers due to their gender. Background and Purpose Retirement which qualify for favorable federal income tax treatment may be broadly classified as either defined contribution or defined benefit plans. Defined contribution specify the amount of employee and employer contributions, and the amount that eligible retirees receive will vary with these contributions and the return earned by the plans. In contrast, defined benefit specify the amount that retirees are to receive, and the amount paid into the will vary to provide the specified benefits. Only defined benefit are incorporated into the present analysis because of a need for a reasonable constraint for the scope of this study and because of . . . the near universal appeal of defined benefit plans (Ippolito, 1986, p. 7). In 1984, there were 38.5 million active participants in primary pension plans. There were 31.3 million of these enrolled in defined benefit while only 7.2 million were enrolled in defined contribution (Ippolito, 1986). Generally, defined benefit are expressed in terms of a formula. A typical defined benefit formula (Jacobs and Watkins, 1984 and Ippolito, 1986) is: Average Yearly Years Annual Annual x Benefit x of = Retirement Salary Percentage Service Benefit The above formula shows the critical impact that the average annual salary, unit benefit percentage, and years of service have on the annual retirement benefit -- e.g., the higher the salary during the years used to calculate the average, usually the last three years of employment, the higher the annual benefit. Accordingly, any growth or decline in any one of the three factors will directly increase or decrease the retiree's payout or benefit. …

TARIFF FORMATION IN A MULTIDIMENSIONAL VOTING MODEL*

The theory of endogenous trade policy formation argues that tariffs emerge from the political process. This occurs because of conflicting economic interests trying to redistribute income in their favor through the adoption of suitable trade policies. Mayer and Riezman (1987) questioned this view arguing that if individuals differ only in factor ownership they would always prefer some tax/subsidy policy to tariffs. Here we allow individuals to differ not only with respect to factor ownership, but also with respect to consumption preferences and income tax treatment. We show that tariffs might be the social decision even though nobody's individual preferences suggest tariffs as the best choice.