Tax Reforms as Capital Market Development Factor

The article presents the preconditions of Armenian capital market development. A few hypotheses are proposed concerning correlation between direct taxes (in particular, profit tax and income tax) and financial sector development mediated with shadow economy. On the basis of studied theories and our empiric research (regression analysis of key indicators), our hypotheses were proven. So for the further development of Armenian capital market we consider it necessary to depart from profit tax, concurrently reducing income tax and social security tax rates.     

Tax Uncertainty and Investment: A Cross-Country Empirical Examination

An empirical examination of uncertain tax policy is crucial to a full understanding of the interplay between taxes and investment, especially given the ambiguities in the limited theoretical literature. This article empirically investigates the impact on investment of volatility in effective tax rates on capital income in a cross-section of the 15 countries of the European Union, the United States, and Japan. Panel regression results suggest that the volatility of effective tax rates on capital income has a significant negative impact on investment per worker, with elasticities ranging from −0.012 to −0.029.     

THE WELFARE COSTS OF DEFICIT FINANCE

We analyze the welfare consequences of deficit finance in a general equilibrium model fit to the US. economy. Current spending may be financed with current and/or future distortionary taxes. The economy is open to international capital flows. The welfare costs of financing marginal current spending are substantial and are sensitive to the timing of the required taxes; postponing a tax on labor income is advantageous but postponing a tax on asset income is not. Ricardian equivalence poorly approximates the economy we consider.     

HOW DOES GLOBALIZATION AFFECT THE IMPLICIT TAX RATES ON LABOR INCOME,CAPITAL INCOME,AND CONSUMPTION IN THE EUROPEAN UNION?

This article analyzes the effects of globalization on implicit tax rates (ITRs) on labor income, capital income, and consumption in the EU15 and Central and Eastern European New Member States (CEE NMS). We find supportive evidence for an increase in the ITR on labor income in the EU15, but no effect on the ITR on capital income. There is evidence of convergence in terms of the ITR on consumption, as countries with higher than average ITR on consumption respond to globalization by decreasing their tax rates. There are important differences among the welfare regimes within the EU15. Social‐democratic countries have decreased the tax burden on capital, but increased that on labor due to globalization. Globalization exerts a pressure to increase taxes on labor income in the conservative and liberal regimes as well. Taxes on consumption decrease in response to globalization in the conservative and social‐democratic regimes. In the CEE NMS, there is no effect of globalization on the ITR on labor and capital income, but we find a negative impact on the ITR on consumption in the CEE NMS with higher than average ITR on consumption. (JEL H23, H24, H25, F19, F21)     

International Profit‐Shifting out of Developing Countries and the Role of Tax Havens

This article contributes to the debate on how tax avoidance and evasion can hamper development efforts by investigating the link between profit‐shifting out of developing countries and tax havens. Analysis of more than 1500 multinational corporations (MNCs) operating in India shows that in 2010 those MNCs with links to tax havens reported lower profits and paid less in taxes per unit of asset than MNCs with no such links. This confirms the notion that when corporations have links to tax havens they enjoy higher incentives, because of the low tax rates, and opportunities to shift income because of the secrecy provisions tax havens offer.     

THE CREDIT‐CHANNEL TRANSMISSION MECHANISM AND THE NONLINEAR GROWTH AND WELFARE EFFECTS OF INFLATION AND TAXES

With the credit‐channel effect driven by the central bank's open market operations, this paper's model easily gives rise to the nonlinear inflation‐growth nexus, which is evidenced by a number of cross‐country empirical studies. The threshold level of the inflation rate is found to be lower when tax rates are higher. The presence of the credit‐channel effect also provides the rationale for setting positive (and smaller than 1) tax rates on consumption, labor income, and capital income. The optimal tax rates rise as the inflation target declines. Under a fiscal policy rule where labor and capital income taxes move proportionally to each other, the optimal capital income tax rate could be higher than the optimal labor income tax rate. Under a sufficiently large central bank balance sheet, the credit‐channel effect will be so weak that inflation and all kinds of taxes are growth and welfare repressing. This provides a rationale for central banks that have implemented quantitative easing policies to shrink their balance sheets. (JEL E58, E62, O42)     

A THEORY OF THE POLITICALLY OPTIMAL COMMODITY TAX

A theory of the politically optimal tax is developed where tax rates are endogenous and determined by forces in the political market. The theory is used to explain the levels of alcoholic beverage taxes between states in the United States. It is shown that these rates are influenced by the ownership structure existing in the liquor industry, the consumption externalities associated with drinking, the minimum drinking age laws, the earmarking of tax revenues, the enforcement of regulations and real income.     

State and Local Taxation of the Elderly

Using data from Massachusetts, this paper explores the impact of state and local taxes on the elderly. The combined tax burden from the state personal income and sales taxes and the local property tax are, on average, higher for the elderly than the nonelderly only for those with total incomes under $10,000 and over $75,000. High tax burdens on low-income elderly are primarily attributable to the property tax faced by homeowners. High-income elderly face high burdens because the state income tax rate on capital income is higher than the rate on earned income. Evidence suggests that public policies to reduce the property tax burdens on elderly homeowners have been largely ineffective.     

AN ANALYSIS OF THE LAFFER CURVE

The Laffer curve shows the relationship between tax revenue and the personal income tax rate, with tax revenue being a presumably concave function of the tax rate and equal to zero at tax rates of zero percent and 100 percent. If the personal income tax rate is reduced, then tax revenue will decrease (increase) if the economy is on the positively (negatively) sloped section of the Laffer curve. This paper derives a sufficient condition for the economy to be on the positively sloped section of the Laffer curve. In light of the current knowledge of the elasticities of supply of labor and supply of saving, it is difficult to escape the conclusion that a decrease in U.S. personal income tax rates will decrease tax revenue.     

Mental accounting of income tax and value added tax among self-employed business owners

Mental accounting describes a series of cognitive operations that help organize financial activities and facilitate money management. Self-employed taxpayers who make use of a separate mental account for future income tax payments or collected value added tax (VAT) might find it easier to declare their taxes correctly than taxpayers who do not. This study used a questionnaire to investigate whether self-employed taxpayers (N = 350) use mental accounting to manage their income tax and VAT obligations, whether mental accounting relates to tax knowledge, business and personality characteristics, and to what extent mental accounting is related to intended tax behavior. Our results reveal that some taxpayers mentally segregate taxes from turnover (segregators) while others do not (integrators). We found small differences in mental accounting between income taxes and VAT. Moreover, confirmatory factor analyses suggested that tax knowledge and mental accounting are distinct constructs. Segregation of taxes was related to lower impulsivity and more positive attitudes toward taxation. Individuals who stated they segregate taxes due from turnover more often claimed to run financially prosperous businesses. Mental accounting was not related to intentions of evading taxes, but individuals with higher mental accounting scores reported more pronounced levels of tax planning. While our research design does not allow drawing causal inferences, these findings could suggest that increasing self-employed taxpayers’ ability to organize their financial activities might be a promising strategy to strengthen the competitiveness of their businesses.     

The impact of taxes and transfer payments on the distribution of income: A parametric comparison

The Luxembourg Income Study data is used to explore the impact of taxes and transfer payments on the distribution of income across 13 countries for different years. The five-parameter generalized beta distribution and 10 of its special cases are considered as models for the size distribution of income. Maximum likelihood methods are used to estimate the model with corresponding measures of goodness of fit and inequality reported. These results identify the best-fitting two-, three-, and four-parameter models as well as describe the inter-temporal patterns of inequality corresponding to earnings, total income, and disposable income. A general pattern of increasing inequality is observed for almost all countries considered along with significantly different distributional impacts of taxes and transfer payments across countries.     

Psychological taxing in Flemish municipalities

We analyse whether the psychological pricing in the private sector has a public sector counterpart in tax policy. Analysing the main theoretical arguments for the existence of price points, and applying them to the public sector, suggests that psychological taxing reveals itself by the use of non-0 ending tax rates. The tax rate endings of the local income taxes, which are set by 308 Flemish municipalities in the fiscal year 1998, suggests the presence of psychological taxing. Non-0 endings occur more frequently in municipalities where demand for public policy is more elastic (and where, therefore, the benefits to the politicians from setting a tax just below a tax point is higher). The pre-tax income inequality and the level of the tax rate positively affect psychological taxing. The latter effect is reinforced in those municipalities where the existing tax rate is above the average tax rate in neighbouring municipalities and below their neighbours’ minimum, although this effect has a limited effect and is offset the further below the minimum the tax is set.     

Tax morale and fairness in conflict an experiment

Most people pay their taxes most of the time, even if the expected disutility from enforcement is too low to deter tax evasion. One potential reason is tax morale and, more specifically, rule following. In a lab experiment, we show that the willingness to pay taxes just because participants are told they are supposed to pay is indeed pronounced. Yet compliance is reduced if participants learn that income is heterogeneous. The effect is driven by participants with the lowest income. The reduction obtains irrespective of the tax regime. If the tax is proportional to income, or progressive, participants become more skeptical about the willingness of participants with high income to comply.     

Shall we keep the highly skilled at home? The optimal income tax perspective

We examine how allowing individuals to emigrate to pay lower taxes abroad changes the optimal non-linear income tax scheme in a Mirrleesian economy. An individual emigrates if his domestic utility is less than his utility abroad net of migration costs, utilities and costs both depending on productivity. Three average social criteria are distinguished—national, citizen and resident—according to the agents whose welfare matters. A curse of the middle-skilled occurs in the first-best, and it may be optimal to let some highly skilled leave the country under the resident criterion. In the second-best, under the Citizen and Resident criteria, preventing emigration of the highly skilled is not necessarily optimal because the interaction between the incentive-compatibility and participations constraints may cause countervailing incentives. In important cases, a Rawlsian policymaker should decrease top marginal tax rates to keep everyone at home.     

Attitudes towards inheritance taxation – results from a survey experiment

Inheritance taxation divides public opinion and is among the most unpopular taxes in many countries, although only a minority of people have to pay it. Using a survey experiment with vignettes on a sample of German citizens (N = 479), we examine attitudes towards inheritance taxation. Our results reveal several relevant dimensions for a proposed fair inheritance tax rate (PITR): The PITR decreases with a close relationship between testator and heir and when the asset is a family-occupied house or family enterprise compared with a “lump sum”. It increases with the value of bequest and income of the heir representing equity considerations. Respondents advocate higher tax rates to reduce fiscal budget deficits. Respondents with a strong family orientation propose a low inheritance tax rate.     

STATE TAXES AND LEGISLATIVE TURNOVER IN THE UNITED STATES

Mounting empirical evidence suggests that term limits and, by extension, higher legislative turnover increase the overall size of government and change its spending composition. However, less is known about the turnover's impact on the composition of tax revenues. This study fills this void by exploiting exogenous variation in term limits and redistricting as instruments for legislative turnover, which is found to be positively associated with most state taxes except for the corporate income tax. We hypothesize that the negative association between legislative turnover and corporate income taxes might be influenced by a higher propensity of business owners to enter term-limited state legislatures. (JEL H7, H3)     

Income tax schedule and redistribution in direct democracies – the Swiss case

This study examines redistribution policy through personal income taxes in Swiss cantons over the period 1995–2011. In a first step, redistribution measures are estimated with the help of exhaustive administrative data. Redistribution is decomposed into average tax rate and tax progression. In a second step, we investigate the impact of direct democratic institutions and their usage on tax policy and redistribution. The results suggest that the effect of direct democracy on income tax redistribution is a multilayered process. First, the theoretical availability of direct democracy tools does not seem to have the same impact as the effective use of them. Second, fiscal referendums may – in the short term –reduce redistribution through lower tax rates and lead to less tax progression. Third, an increasing number of ballots on initiatives leads to more tax progression and more redistribution in the long run. It seems that the short-term dampening effects of fiscal referendums on redistribution may be overridden in the long run by the expansive effect of popular initiatives.     

TEMPTATION‐DRIVEN BEHAVIOR AND TAXATION: A QUANTITATIVE ANALYSIS IN A LIFE‐CYCLE MODEL

This paper examines the impact of labor and capital income taxes in a stochastic overlapping generations (OLG) economy where agents face borrowing constraints and their behavior is temptation driven. We quantitatively establish that the existence of temptation in preferences may function as an opposing mechanism to modeling choices, such as liquidity constraints, life‐cycle structure, and idiosyncratic earnings risks, that are critical in delivering a positive capital income tax rate. We show that a sufficiently large measure of individuals having self‐control preferences, or alternatively, a sufficiently high cost of exercising self‐control, puts downward pressure on the optimal capital income tax rate. (JEL E21, E62, H55)     

TAXATION, AGGREGATE ACTIVITY AND ECONOMIC GROWTH: CROSS-COUNTRY EVIDENCE ON SOME SUPPLY-SIDE HYPOTHESES

Data from sixty-three countries are used to examine the impact of average and marginal tax rates on the level and growth of economic activity. Apparent negative effects of tax rates on growth disappear upon controlling for (1) potential endogeneity of average tax rates to per capita income and (2) the relation between economic growth and per capita income. However, controlling for average tax rates, increases in marginal tax rates have negative effects on the level of economic activity. This evidence supports the hypothesis that reductions in the "progressivity" of tax rates induce a parallel shift upward in the growth path.     

Does the tax system ruin the motivation to seek advancement?

A number of hypotheses related to the effects of taxes and to social comparison processes were tested by means of a mail questionnaire in a study of 338 salaried employees, mostly in middle management positions. The results indicate that the tax system with progressive income taxes and increasing marginal rates of taxation did not serve as a significant inhibitor to the promotion will. Other factors such as the acceptability of the expected net salary raise in connection with a promotion, age level and the degree of social comparison influenced the promotion will and made the picture rather complex. People who wanted to be promoted were young, compared themselves with colleagues, had a relatively low income level and attached low importance to family and leisure activities.