Adding it all up
Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States
Jason DeBacker, Bradley Heim & Anh Tran
Journal of Financial Economics, forthcoming
Abstract:
We study how cultural norms and enforcement policies influence illicit corporate activities. Using confidential Internal Revenue Service (IRS) audit data, we show that corporations with owners from countries with higher corruption norms evade more tax in the U.S. This effect is strong for small corporations and decreases as the size of the corporation increases. In the mid-2000s, the United States implemented several enforcement measures to increase tax compliance. We find that these enforcement efforts were less effective in reducing tax evasion by corporations whose owners are from corrupt countries. This suggests that cultural norms can be a challenge to legal enforcement.
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Statistical Security for Social Security
Samir Soneji & Gary King
Demography, August 2012, Pages 1037-1060
Abstract:
The financial viability of Social Security, the single largest U.S. government program, depends on accurate forecasts of the solvency of its intergenerational trust fund. We begin by detailing information necessary for replicating the Social Security Administration's (SSA's) forecasting procedures, which until now has been unavailable in the public domain. We then offer a way to improve the quality of these procedures via age- and sex-specific mortality forecasts. The most recent SSA mortality forecasts were based on the best available technology at the time, which was a combination of linear extrapolation and qualitative judgments. Unfortunately, linear extrapolation excludes known risk factors and is inconsistent with long-standing demographic patterns, such as the smoothness of age profiles. Modern statistical methods typically outperform even the best qualitative judgments in these contexts. We show how to use such methods, enabling researchers to forecast using far more information, such as the known risk factors of smoking and obesity and known demographic patterns. Including this extra information makes a substantial difference. For example, by improving only mortality forecasting methods, we predict three fewer years of net surplus, $730 billion less in Social Security Trust Funds, and program costs that are 0.66% greater for projected taxable payroll by 2031 compared with SSA projections. More important than specific numerical estimates are the advantages of transparency, replicability, reduction of uncertainty, and what may be the resulting lower vulnerability to the politicization of program forecasts. In addition, by offering with this article software and detailed replication information, we hope to marshal the efforts of the research community to include ever more informative inputs and to continue to reduce uncertainties in Social Security forecasts.
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Preferences in Context: Micro Preferences, Macro Contexts, and the Demand for Social Policy
Jane Gingrich & Ben Ansell
Comparative Political Studies, December 2012, Pages 1624-1654
Abstract:
Political economists have increasingly looked to understand social welfare policy as a product of individual-level demand for social spending. This work hypothesizes that individuals with riskier jobs demand more social spending and that large welfare states emerge where there are more of such individuals. In this article we build on the "policy feedback" literature to argue that existing welfare institutions condition how individual-level factors affect social policy preferences. Specifically, we argue that institutions directly altering the risk of unemployment (employment protection legislation) and those that delink benefits from the labor market create a more uniform system of social risk that reduces the importance of individual-level risk in shaping policy preferences. We test these propositions using multilevel analysis of 19 advanced industrial countries in 2006. We find that individual risk matters for social policy preferences only where employment protection is low and welfare benefits are dependent on employment.
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Corruption, Bureaucratic Failure and Social Policy Priorities
Carl Dahlström, Johannes Lindvall & Bo Rothstein
Political Studies, forthcoming
Abstract:
This article argues that bureaucratic capacity - the competence and reliability of the national bureaucracy - matters to the allocation of public spending among welfare state programmes since it is difficult for governments to justify high levels of spending on programmes that require bureaucrats to make case-by-case decisions, on a discretionary basis, if the bureaucracy is incompetent, corrupt or both. We expect bureaucratic capacity to have a positive effect on programmes that involve bureaucratic discretion, but weak or no effects on programmes that are more straightforward to implement. In order to test these hypotheses, we analyse public spending on active labour market programmes (which involve a lot of discretion) and parental leave benefits (which involve less discretion). Relying on data for twenty advanced democracies from the mid-1980s to the mid-2000s, we find that high bureaucratic capacity does have a positive effect on active labour market policy spending, but not on parental leave benefits.
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Matthew Weinzierl
NBER Working Paper, December 2012
Abstract:
At the heart of modern optimal tax research is the assumption that the objective of taxation is Utilitarian. I present new survey evidence that most people disagree with this assumption, preferring tax policies based at least in part on a classic alternative objective: the principle of Equal Sacrifice. I generalize the standard model to accommodate this preference for a mixed objective. Then, I show that optimal policy in this generalized model, calibrated to the survey evidence, quantitatively matches several features of existing tax policy that are incompatible in the conventional model but widely endorsed in reality, including the coexistence of substantial redistribution and limited tagging. Additional implications increase the appeal of these steps toward a positive theory of optimal taxation.
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Preference Heterogeneity and Optimal Capital Income Taxation
Mikhail Golosov et al.
Journal of Public Economics, January 2013, Pages 160-175
Abstract:
We examine a prominent justification for capital income taxation: goods preferred by those with high ability ought to be taxed. In an environment where commodity taxes are allowed to be nonlinear functions of income and consumption, we derive an analytical expression that reveals the forces determining optimal commodity taxation. We then calibrate the model to evidence on the relationship between skills and preferences and extensively examine the quantitative case for taxes on future consumption (saving). In our baseline case of a unit intertemporal elasticity, optimal capital income tax rates are 2% on average and 4.5% on high earners. We find that the intertemporal elasticity of substitution has a substantial effect on optimal capital taxation. If the intertemporal elasticity is one-third, optimal capital income tax rates rise to 15% on average and 23% on high earners; if the intertemporal elasticity is two, optimal rates fall to 0.6% on average and 1.6% on high earners. Nevertheless, in all cases that we consider the welfare gains of using optimal capital taxes are small.
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Tax Aggressiveness and Accounting Fraud
Clive Lennox, Petro Lisowsky & Jeffrey Pittman
Journal of Accounting Research, forthcoming
Abstract:
There are competing arguments and mixed prior evidence on whether firms that are aggressive in their financial reporting exhibit more or less tax aggressiveness. Our research contributes to resolving this issue by examining the association between aggressive tax reporting and the incidence of alleged accounting fraud. Relying on several proxies for tax aggressiveness to triangulate our evidence, we generally find that tax aggressive U.S. public firms are less likely to commit accounting fraud. However, we caution that our results are sensitive to how tax aggressiveness is measured. More specifically, four (two) of the five (three) proxies for firms' effective tax rates (book-tax differences) load positively (negatively) during the 1981-2001 period, implying that fraud firms are less tax aggressiveness. Our inferences persist when we isolate the 1995-2001 period in which accounting impropriety steeply rose and corporate tax compliance steeply fell. Moreover, we continue to find that tax aggressive firms are less apt to fraudulently manipulate their financial statements when we apply factor analysis to identify tax avoidance with a common factor extracted from the underlying proxies and match on propensity scores to ensure that the fraud and non-fraud samples have very similar non-tax characteristics.
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Do Complicated Tax Systems Prevent Foreign Direct Investment?
Martina Lawless
Economica, January 2013, Pages 1-22
Abstract:
The negative relationship between tax rates and FDI is well known. This paper looks at how complexity of the tax system affects FDI. Fulfilling tax requirements can be time-consuming, and this implies a cost for more complex tax systems. Alternatively, complexity may provide opportunities to reduce the overall tax bill. We find that measures of tax complexity have a significant inhibiting effect on the presence of FDI for a country pair, but have little impact on the level of FDI flows. A 10% reduction in tax complexity is comparable to a one percentage point reduction in effective corporate tax rates.
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Multinational firms mitigate tax competition
Johannes Becker & Nadine Riedel
Economics Letters, forthcoming
Abstract:
An increase in the taxation of foreign affiliates reduces domestic investment, as has recently been empirically shown in Becker and Riedel (2012). This paper investigates the implication of this finding for tax competition. It is shown that an increase in the number of multinational firms (in contrast to purely national firms) may actually mitigate tax competition - counter to the popular opinion that multinational firms undermine the national capacity to levy source-based taxes.
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Consumer response to child tax credit
Norbert Michel & Nazneen Ahmad
Empirical Economics, December 2012, Pages 1199-1214
Abstract:
This article uses micro-level data from the Consumer Expenditure Survey (CEX) to study consumers' spending responses to the child tax credit. The article provides one test of the permanent-income hypothesis (PIH) that infers that temporary changes in income have little effect on consumer spending, at the initiation of the child tax credit in 1997, and a second PIH test when the credit was increased in 2003. The evidence supports the PIH in both 1997 and 2003, even using three different proxies for liquidity-constrained households. Separate from any PIH implications, our findings suggest the child tax credit did not provide a short-term consumption stimulus in either of the time periods studied. Our results therefore cast some doubt on whether this type of tax credit should be considered sound fiscal policy.
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How Important Are Perpetual Tax Savings?
James Hines
NBER Working Paper, November 2012
Abstract:
Federal estate taxes give very wealthy families incentives to transfer resources directly to distant generations in order to avoid taxes on successive rounds of transfers. Until recently such transfers were impeded by the rule against perpetuities, which prevented transfers to most potential not-yet-born beneficiaries. Many American states have recently repealed the rule against perpetuities, raising concerns that the combination of tax incentives and new legal rights encourages the devotion of vast wealth to perpetual trusts designed to benefit distant generations, avoid taxes, and maintain a degree of control over the financial affairs of descendants in perpetuity. This paper analyzes the incentives created by federal transfer taxes, finding the tax benefits from establishing perpetual trusts to be quite modest, in representative cases ranging from 9-25 percent of just one component of the cost. Contrary to popular claims, tax benefits decline as investment returns rise. While U.S. states that have repealed the rule against perpetuities and adopted other policies to encourage trusts host substantial trust assets, evidence from tax returns suggests that perpetual trusts are unlikely to account for a significant portion of this business. Consequently, tax incentives may not be responsible for an important shift of assets into perpetual trusts.
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European taxation during the crisis: Does politics matter?
Hanna Lierse
Journal of Public Policy, December 2012, Pages 207-230
Abstract:
With the outbreak of the financial crisis in 2008, European governments extensively intervened to avert a severe economic recession. Taxation is a crucial instrument to achieve such economic objectives, but it also represents a redistributive tool in democratic societies. Generally, left-wing parties are more supportive of progressive taxes and redistribution than right-wing governments. As a crisis response, one could assume that European governments, especially social-democratic ones, reinforced a redistributive stance to compensate for the substantial amounts of public money used to bail out financial institutions. Based on the tax reforms introduced between 2008 and 2010, the paper explores the tax strategies adopted by European governments. The findings do not reveal a direct effect of party politics on taxation but rather show that pressures from the capital markets significantly restrained governments' policy capacities to act.
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Rune Sørensen
European Journal of Political Economy, forthcoming
Abstract:
A recurrent assertion is that aging will intensify age-related conflict over public budget allocation. If people are led by their self-interest, the young will prioritize public education services, while the elderly will demand better pensions and health-care services. Addressing this issue requires longitudinal survey data and estimation of age (life-cycle), period and cohort effects. Except for a few of studies based on US data, such analyses are non-existent. We use repeated cross-section survey-data for 22 countries. Respondents are classified into ten-year age-groups and birth decades, and we estimate a regression model explaining respondents' public spending preferences. When period and cohort effects are taken into account, elderly people want less education spending, and more health care and pension spending. These life-cycle effects vary considerably between countries, but are generally quite small. Preferences also appear mostly unrelated to left-right party choice.
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Johan Bo Davidsson & Paul Marx
Political Studies, forthcoming
Abstract:
Welfare state research tends to assume strong and enduring public support for welfare state institutions. We challenge this assumption and show that in times of economic crisis, positive welfare state attitudes are confronted with conflicting preferences for improvement of labour market performance. We argue that such movements in public opinion have led to issue competition among major political parties and subsequent radical reform of unemployment insurance in two least-likely cases. In both Germany and Sweden, incumbent governments were losing voters' confidence as a result of high and persistent unemployment. In Germany, the social democratic government saw falling competence ratings at the same time as the issue of unemployment was highly salient among voters. In order to win back confidence, the party shifted its policy stance and introduced reforms which reshaped the unemployment insurance system. In Sweden, the situation was similar with falling ratings for the social democratic government and high levels of salience for the issue of unemployment among voters. When the government did not introduce reforms, the opposition moved in and won issue ownership, and subsequently the election, on an agenda of radical reform.
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Morten Blekesaune
Journal of Social Policy, January 2013, Pages 57-72
Abstract:
Is public support for redistribution affected by the number of people experiencing economic strain in a country? This question is investigated by comparing twenty-eight countries in the fourth round of the European Social Survey 2008-09 using two-level linear regression models. The results show that individuals reporting economic strain support redistribution more strongly than those who do not experience economic strain. Further, individuals living in countries where many other people report economic strain also support redistribution more strongly than individuals living in countries with less economic strain. The latter correlation is not explained by objective measures of the economic situation such as household income or the income dispersal of the country. The country-level effect of economic strain holds for all income levels. It is largely driven by a tendency to strongly believe in redistribution when living in countries of widespread economic strain. The results indicate that governments would receive more rather than less public support for redistributive policies during periods of economic strain.
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The politics of digits: Evidence of odd taxation
Asmus Leth Olsen
Public Choice, January 2013, Pages 59-73
Abstract:
From the concept of odd pricing, i.e., setting rightmost price digits below a whole number, this paper advances the political counterpart of odd taxation using a panel of Danish municipal taxes. First, the distribution of tax decimals is non-uniform and resembles the distribution of price-endings data. Second, nine-ending and other higher-end decimals are found to be over-represented which echoes odd pricing research. It suggests that incumbents take voters' biases into account and apply odd taxes to minimize the political costs of taxation while maximizing revenue. Attention should be given to how policy digits are arranged to exploit voters' cognitive biases.
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City Size and the Demand for Local Public Goods
Thiess Buettner & Fédéric Holm-Hadulla
Regional Science and Urban Economics, forthcoming
Abstract:
This paper studies how size-induced cost differences in the provision of local public goods affect the efficient level of public spending. Since public goods are non-rival in consumption, the per-capita cost of a given level of public good provision is lower in more populous jurisdictions. We show that this cost advantage gives rise to a substitution of public for private consumption and specify conditions under which the efficient level of local public expenditures per capita rises with a jurisdiction's population size.
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George Krause, David Lewis & James Douglas
Journal of Policy Analysis and Management, forthcoming
Abstract:
Governments make policy decisions in the same areas in quite different institutions. Some assign policymaking responsibility to institutions designed to be insulated from myopic partisan and electoral pressures and others do not. In this study, we claim that differences in political context and institutional design constrain the policy choices governments make. Testable propositions based on an analysis of varying electoral incentives and time horizons created by these different contexts are empirically tested using panel data on official general fund revenue forecasts in the American states, 1987 to 2008. The empirical evidence reveals that executive branch agencies and independent commissions produce more conservative forecasts than legislatures with one important exception. Executive branch revenue forecasts in states with gubernatorial term limits are indistinguishable from legislative branch forecasts. Further, we find that legislative branch forecasts are more conservative in the presence of divided partisan legislatures than unified party government. In turn, this implies that entrusting policymaking authority to either the executive branch or an independent commission may only be consequential when the political system itself fails to check legislative excesses or executive myopia.
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Do Publicly Disclosed Tax Reserves Tell Us About Privately Disclosed Tax Shelter Activity?
Petro Lisowsky, Leslie Robinson & Andrew Schmidt
Journal of Accounting Research, forthcoming
Abstract:
We examine whether public disclosures of tax reserves recently made available through Financial Interpretation No. 48 (FIN 48) reflect corporate tax shelter activities. Understanding this relation is important to corporate stakeholders and researchers keen to infer the aggressive nature of a firm's tax positions from its tax reserve accrual. Our study links public disclosures of tax reserves with mandatory private disclosures of tax shelter participation as made to the Internal Revenue Service's Office of Tax Shelter Analysis. We find strong, robust evidence that the tax reserve is positively associated with tax shelters, while other commonly used measures of tax avoidance are not. Based on out-of-sample tests, we also show that the reserve is a suitable summary measure for predicting tax shelters. The tax benefits of tax shelters are economically significant, accounting for up to 48 percent of the aggregate FIN 48 tax reserves in our sample.
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Charitable giving in the German welfare state: Fiscal incentives and crowding out
Timm Bönke, Nima Massarrat-Mashhadi & Christian Sielaff
Public Choice, January 2013, Pages 39-58
Abstract:
There are two ways that government activities influence private charitable giving: (1) government spending on the provision of public goods may cause crowding out of private charitable contributions; and (2) tax incentives may boost private charitable giving. From a sample of German income tax returns, we estimate the elasticity of charitable giving relative to tax incentives, income, and government spending. Using censored quantile regression analysis, we derive results for different points of the underlying distribution of charitable giving. Evaluating overall treasury efficiency, the tax deductibility of charitable donations fosters enough private giving to offset foregone tax revenues.