Trade Taxes Research Articles

Did they learn to tax? Taxation trends outside the OECD

ABSTRACTWe map trends of tax policy change in developing countries and transition economies since the 1980s, compare them to tax trends in the advanced Western democracies and review some of the explanations offered by the contributions to this volume. We find that non-Western countries follow the lead of Western countries in some important respects but not in others. While non-Western countries brought their general revenues closer to Western levels and copied important features of Western consumption taxation including higher value added tax revenues and lower revenues from trade taxation, they failed to emulate the hallmark of 20th-century Western taxation: a strong and progressive personal income tax. The taxation trends are closely associated with socio-economic changes (as summarized by GDP per capita) and structural factors (as summarized by country size). Yet the impact of political institutions on taxation is non-linear and complex.

Trade liberalization and the challenges of revenue mobilization: can international financial institutions make a difference?

ABSTRACTDeveloping countries are being confronted with severe fiscal challenges in the global economy. Over the last two decades, governments have been accepting significant reductions in trade taxes to support trade liberalization. This is particularly problematic for developing economies because trade taxes have been a key source of government revenues. In this paper, we investigate the conditions under which international financial institutions (IFIs) successfully assist developing countries with recovering the lost revenue from trade liberalization by implementing various domestic tax reforms. We argue that regime type mediates the effectiveness of IFI assistance in developing economies, after trade reforms have been adopted. More specifically, IFIs will be more effective at assisting authoritarian regimes with domestic tax reforms as a substitute for trade taxes than they will be in poor democracies. Democratically elected leaders inadvertently undermine multilateral assistance with tax reforms because they are more susceptible to middle- and upper-class demands for lower taxes in a competitive global economy. In authoritarian regimes, on the other hand, IFIs such as the World Bank and International Monetary Fund tend to be more effective because dictators are likely to experience far fewer political consequences for accepting IFI assistance and implementing tax reform in the global economy than their democratic counterparts.

Assessing the Impact of Industrial Policies on Economic Development in Nepal

This study analyzes the impact of industrial policies on Nepalese economic development. For this, simple regression model has been applied to estimate the impact of industrial policies on macroeconomic growth. The impact of industrial policies is analyzed as pre-liberalization period (1974/75-1991/92), post liberalization period (1991/92-2009/10) and whole period (1974/75- 2009/10). The result shows that there are significant positive relationship between economic openness and industrial registration, GDP, industrial GDP, employment, investment, foreign trade (imports and exports), trade balance, total revenue and trade tax in the whole of 1974/75- 2009/10. During pre-liberalization period, these relationships have also been found positive, as well. But, during the post liberalization period, the impact of economic openness on the growth of industries, GDP, employment, investment, total revenue, trade tax, total trade, import trade, export trade and trade balance are not found positive. To achieve the satisfactory result the government policies should be appropriately reviewed to make them investment friendly and accelerate the industrial development in Nepal.Economic Journal of Development Issues Vol. 17 & 18 No. 1-2 (2014) Combined Issue, Page: 40-75

Aid for Trade and trade tax revenues in developing countries

This paper examines whether Aid for Trade (AfT) compensates for the losses of trade tax revenues in developing countries further to the liberalization of their trade regimes. The empirical analysis suggests that unlike other countries, AfT flows to highly AfT-dependent countries are not affected when these countries experience lower trade tax revenue. It would therefore be desirable that donors extend higher AfT to recipient-countries, notably poorest countries when they are confronted with losses in their trade tax revenue. This is particularly important for them given the structural challenges associated with their tax transition reform.

Trade liberalization and the global expansion of modern taxes

ABSTRACTFor a long time, governments relied heavily on trade taxes as the main source of public finance, and for some countries, mainly less developed ones, they still account for a large share of revenue. Yet, with trade liberalization, governments have been forced to abandon these easy-to-collect taxes and to adopt modern hard-to-collect taxes, mainly internal income and consumption taxes. Surprisingly, we know little about how governments across the world have addressed this common challenge. In this paper, we analyze the rise of the most important present taxes: the personal and corporate income tax, the general sales tax and the value-added tax. Based on a self-coded dataset, we provide a historical-descriptive outline of the expansion of modern taxes since 1842 and test the effect of trade liberalization on the probability to adopt hard(er)-to-collect taxes. While trade is an important determinant for the legislation of modern taxes, we find that its influence is not universal but depends on the tax type. Only the personal income tax and the value-added tax have served as a revenue substitution to trade taxes, while the general sales tax and the corporate income tax were rather fueled by other factors such as spending pressures.

Contribution of Direct Taxation on Municipality's Expenditure: Special Reference to Kalmunai Municipal Council in Sri Lanka

The taxation is a great economic tool to govern economics for any country. Under the concept of tax, direct taxes are playing an essential role in the revenue collection of local governments of a country. Through this revenue local governments are making expenditure to give public services to the people. In order to that, the objective of the study is that identifying the contribution of direct taxes on the expenditure of Kalmunai Municipal Council. The primary and secondary data was used for the study. The primary data was collected through the Interview, and telephone conversation. The secondary data was collected through the budget, Final year reports and Citizen's Guide book of Kalmunai Municipality within the period from 2001 to 2014. The objective was analyzed through the multiple regression models. The results show that, the assessment tax and the Business tax have positive impact on the expenditure of Municipality while the entertainment tax has the negative impact. And also The Business and Trade tax has more influence in the expenditure of Municipality. Therefore to enhance the contribution of these direct taxes within the time period this study suggests to making awareness about the taxes among the people, use some easier payment methods and active administrative work.

Taxes in an E-Commerce Generation

Rapid growth in e-commerce has altered the ability of jurisdictions to enforce commodity taxes on a destination basis. This results in different effective tax rates depending on the way in which goods and services are purchased and the characteristics of both the products and the sellers. We discuss the arguments for the destination principle as the appropriate place-of-taxation rule for consumption taxation of cross-border trade. We analyze various recent reforms to the Value Added Tax in the European Union in response to e-commerce. We then examine various policy options in the United States – maintaining the status quo, changing nexus rules, states adopting information reporting, and national reforms that require firms to remit taxes regardless of physical presence – and relate them to the recent European reforms. We conclude based on our analysis and the recent European Union experience that reforms at the national level appear to be the important next step to enforcing commodity taxes at destination in the U.S.

The Research on the Economic Effect of Market-Based Environmental Policy Instruments

Market-based environmental policy has many forms, including carbon trade and carbon taxes. The choice of market-based environmental policy instruments needs careful consideration of the effect on economy growth and structure. In the analytical framework of Ramsey model, carbon emissions are added into the instantaneous utility function and the problem of maximization of enterprise profits. Based on this hypothesis, the balance growth path and dynamitic changes of consumption and investment could be compared under different market-based environmental policy instruments. The conclusion shows that market-based environmental policy instruments have a negative effect on economic growth in the short run. However, in the long run, these instruments can promote economic growth and optimize economic structure by giving enterprises motivation to improve emission reduction technology. The distinction of these two environmental policy instruments lies in the difference between the price of carbon emission permit and the rate of carbon taxes. Moreover, by derivation, it is obvious that saving rate is inversely linked to carbon tax rate (or the price of carbon emission permit). Therefore, according to the current situation in China’s economic development, in order to improve consumption’s contribution on economic growth, we can choose the instrument which has higher price to reduce saving rate. In this way, consumption can be promoted and the structure of economics can be optimized.

The Effect of Trade Liberalization on Tax Structure of Pakistan

This study empirically investigates the effect of trade liberalization on tax structure in Pakistan. Autoregressive Distributed Lag approach has been used for examining the cointegration among the variables of the model and Vector Error-Correction method is used for short-run dynamics of the variables. The empirical results show that trade liberalization and trade tax revenue have a negative impact on tax structure in both short and long run. While other control variables, such as budget deficit and external debt servicing is negatively associated with tax structure. The size of the underground economy is used as a proxy for administration capacity, the level of corruption and tax evasion. The empirical results show that the underground economy has also significant negative impact on tax structure. While, real per capita growth, the urban share of population and political stability has a positive impact on tax structure.

РЕГУЛЮВАННЯ МІЖНАРОДНОЇ ТОРГІВЛІ В ЕКОНОМІЦІ МАЛИХ І ВЕЛИКИХ КРАЇН

Size of economy is a factor of international trade regulation. We systematize the effects described in existing research works. Size of economy influences export and import priorities of foreign trade policy, efficiency of tariff regulation or tariff liberalization, sophistication of customs procedures, indirect tax rates for imports, prevalence of subsidies and trade remedies, importance of foreign trade taxes for the government revenues, opportunities and stimuli for trade disputes and wars. It is more difficult for small countries to carry out import substitution policy. In small countries tariff regulation is less efficient, considering the absence of the terms of trade effect and market competition deterioration. But under larger trade openness customs tariffs are more important for the state budget of small countries. Non-tariff regulation is more sophisticated in large countries. The balance of economic stimuli and opportunities in trade wars and disputes is not favorable for middle-sized economies. We extrapolate the abovementioned effects to Ukraine as a middle-sized economy. This allows us to provide recommendations for its foreign trade policy: differentiated trade liberalization, dependence of the optimal foreign trade taxation level on trade openness and trade balance, collective trade sanctions.

The German CFC Rules after the Federal Fiscal Court Decision of 11 March 2015: A Toothless Tiger?

The groundbreaking ruling by the German Federal Fiscal Court dated 11 March 2015 significantly reduced the legal consequences of the German CFC rules, as income that is taxed under the CFC rules is now no longer subject to German trade tax. Especially for German corporate shareholders in CFCs, this reduces the tax burden by about 50%. This, in connection with the favourable taxation of dividends under the German CFC regime, has a tremendous impact on international tax planning from a German perspective. It leads to the question if even offshore investments triggering the German CFC regime are now being preferable to German domestic investment structures. Given this background, the following article revisits opportunities and challenges from a German tax planning perspective.

Determinants of Latin America’s Overreliance on International Trade Taxation

This paper investigates the determinants of Latin America’s overreliance on international trade taxation as a source of governmental revenue. Latin America, more than any other region of the world relies on international trade taxation as a source for governmental revenue. A number of hypotheses are tested including ordinary least squares regressions of the effect of income inequality on the extent to which a country relies on international trade taxation as a source of governmental revenue. It is hypothesized that counties with high levels of income inequality have difficulty collecting income taxes and accordingly disproportionately rely on international trade taxation. The analysis indicates that there is a statistically significant correlation between Latin America’s high levels of income inequality and its reliance on international trade taxation as a source of governmental revenue. As a consequence of Latin America’s excessive reliance on international trade taxes further trade liberalization in the region will be unlikely.

Progressive Optimal Technology-based Border Carbon Adjustment (POT BCA) - A New Approach to an Old Carbon Problem

The idea of Border Carbon Adjustment (BCA), which makes it possible to transform the standard tax on carbon emissions from production (origin principle) to a tax system imposed at the point of consumption (destination principle), has received a considerable amount of attention from academia and policymakers. In this paper, we go back to the source of environmental destination-based taxation and generalize the results of Markusen (Journal of International Economics, 5, 15–29, 1975) for optimal tax and tariff by extending domestic environmental policy on both goods featuring positive carbon intensities. Following Jakob et al. (Environmental and Resource Economics, 56(1), 47–72, 2013) we remove the strategic term from the optimal tariff and deal with the so-called optimal carbon tariff, targeting primarily environmental externality. Further, we develop a handy approximation for optimal tax and optimal carbon tariff structure in a multiple good setting. Such trade taxation is, however, likely to face further legal obstacles, which may hinder its implementation. This motivates us to adjust the results accordingly and to include refunds for low-carbon investments in a ‘dirty’ country granted proportionally to the difference in carbon intensities between trade partners. This new scheme, known as Progressive Optimal Technology-based Border Carbon Adjustment (POT BCA), mitigates several legal problems and increases political acceptance compared to the ‘standard’ BCA. It can also be seen as advantageous from the economic point of view: it mimics the performance of the optimal carbon tariff while aiming to decrease foreign carbon intensity over the long term.

Recent Developments in the German Tax Treatment of CFCs

This note describes the tax treatment of controlled foreign companies (CFCs) under German tax legislation and case law. In a recent decision of the German Federal Tax Court, the taxpayer was not required to pay trade tax on CFC income, thus altering the tax consequences of CFC income significantly. This decision has aligned the German tax treatment of CFCs with that of foreign permanent establishments, the income of which is also not subject to trade tax.

Trade liberalization and tax revenue in transition: an empirical analysis of the replacement strategy

Trade liberalization in transition economies has been followed by a significant reduction in government revenue from trade taxes. This paper empirically tests whether and to what extent domestic tax revenue has actually compensated for the trade tax revenue lost by looking at the experience in a panel of 33 transition countries in Eastern Europe, the former Soviet Union, and North Africa and the Middle East. The paper finds evidence of strong revenue replacement for total domestic tax revenue. The contribution of the different taxes to the replacement strategy is, as expected leaded by the Value-added Tax, followed by a lower contribution from the personal income tax (PIT). The paper also provides some empirical evidence suggesting that replacement may have been higher for countries in the run-up to the EU, and that countries with a high tax revenue effort may have relied relatively more on the PIT to replace trade taxes.

The Development and use of Economic Instruments in Environmental Policy: The Case of Israel

Recently, Israel has undergone several changes in its environmental policy. This paper reviews the shift in environmental policy, from regulatory-based instruments to more flexible economic instruments in Israel. A substantial change has taken place in this respect over the last few decades in many OECD countries. In recent years, environmental policy in Israel has been going through a similar change, in part due to the recent accession to the OECD. Yet, Israel still lacks the use of certain main economic tools, such as greenhouse gas emissions trading and carbon taxes, which are available in many OECD countries.

Linking Customs Valuation and Transfer Pricing in the U.S. And Beyond

The exponential growth of international trade and the rapid expansion of corporate supply chains due to the rapid globalization of recent decades have placed increasing strains on systems of trade regulation and tax administration designed for a world of discrete states and corporate entities. A particular area where this tension has become pronounced is in the disconnect between customs valuation and transfer pricing, the legal regimes for valuing international transactions for purposes of assessing import tariffs and corporate income tax respectively. While both systems establish similar broad baselines — the “arm’s-length principle” for transfer pricing and the “transaction value principle” for customs valuation — because of the different goals of each system and the scope of transactions to which each applies, the specific methods used differ, leading to confusion and inefficiency. Efforts to coordinate the two systems, both at an international level and in the U.S., are progressing but incomplete. This paper illuminates the disparity in these two systems, with a specific focus on the U.S, through studying current laws, regulations, and practices in both areas, along with the steps taken thus far to align them, concluding with recommendations for how these efforts should be continued. This paper was written for the Transfer Pricing: Special Topics graduate-level seminar at Georgetown University Law Center during the Spring 2015 term.

Capital control and exchange rate volatility

The study offers one conceptual and theoretical framework for evaluating the economic effects of a trading tax on foreign exchange transactions. Taxes and the price stickiness mechanism are taken into account in the model. When prices are flexible, full monetary neutrality can be obtained even in the short-term. Intuitively, taxes on foreign exchange transactions discourage speculation by rising currency trading costs, and, thus, increase the stability of the exchange rate. Finally, the results show that not only the exchange rate but consumption, investment and employment will become less volatile by imposing trading taxes on foreign exchange transactions.

Trade Policy in Lobbying Equilibrium: With Non‐Traded and Traded Final Goods and Intermediate Inputs

The paper derives trade policies endogenously for final consumption and intermediate input industries in the presence of a non‐traded sector. Contrary to what the existing literature suggests, results show that there is no definite relation between lobbying status and the direction of trade policy of an industry. Trade protection of an industry depends on how its consumption (horizontal) and production (vertical) linkages with other industries reinforce or cancel out its lobbying efforts. To cite a few results, (i) an organized industry may face trade tax, whereas an unorganized one may obtain protection; (ii) an organized downstream industry may not be able to impose trade tax to an unorganized upstream industry, (iii) an organized upstream industry may not hurt unorganized downstream industry, (iv) lobby for non‐traded industry alone can influence trade policies, and (v) lobby for traded industry affects the size of the non‐traded sector in the economy.

Tax and Expenditure Reforms in Africa: An Overview

Taxation is recognised as being able to affect economic growth, poverty and inequality. In Africa, taxation is an instrument that can be used to promote development. Like other countries, African governments have undertaken tax reforms aimed at increasing tax revenues, but at the same time reducing trade taxes and high marginal tax rates. Reforms include introducing broad-based consumption taxes, simplified tax design and improved tax administration. Emerging ideas include the ‘optimal tax policy’, which states that all taxation distorts market incentives, and reforms should be driven by the aim of minimising these distortions. A challenging aspect of a ‘growth friendly’ tax reform agenda would be how to ensure that increasing taxation does not erode the small existing tax base by inducing further distortions. The three papers in this special edition look at tax reform in relation to investment, to tax evasion and economic growth and also to the equity and efficiency trade-offs. Tax reforms are found to be successful in modestly increasing GDP growth, while reducing poverty and inequality. These outcomes are driven by the positive impacts that expenditures on infrastructure, operations and maintenance have on total factor productivity. Improved legal and regulatory frameworks, coupled with transparent and accountable institutions in Africa, and well-developed social welfare expenditure architecture capable of recycling revenues back to poor individuals will help improve tax collection and development. Without these features, the tax reform agenda would likely have almost no impact on the African economies.