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Some corporations attempt to lessen their tax burden through involvement in the legislative process. We identify firms that contributed to congressional candidates who favor reductions in the U.S. corporate statutory tax rate. This support created a temporary incentive to manage effective tax rates (ETRs) up. We document that these firms increased their reported effective tax rate in the two calendar quarters preceding the 2012 election relative to adjacent periods and other firms supporting candidates in the same election. We find that the variation in upward ETR management is correlated with firm-level proxies for potential reputational costs, capital markets costs, and long-run tax burdens. The variation in upward ETR management is also correlated with firm-candidate-level proxies for strength of relationships and competitiveness of election races. Our findings provide new evidence on accounting choices in support of corporate political activity and on the political cost hypothesis in the tax setting. History: Accepted by Shivaram Rajgopal, accounting. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2017.2842. Keywords: corporate political activity * financial reporting choices * political costs hypothesis, 1. Introduction We test the hypothesis that firms affiliated with politicians through campaign contributions use accounting discretion during elections to avoid releasing politically damaging financial information. During an election period, [...]

In this study, we analyzed the drivers of tax evasion occurring through international trade between Benin and its major import partners, namely France--a Western country--and China, a non-Western country. To this end, we scrutinized the co-movement between tax rates and tax evasion, and investigated whether tax evasion in Benin is driven by misclassification behavior or not. Unobservable by nature, tax evasion was measured by missing imports. The results show a positive relationship between tax rates and missing imports expressed in value and in quantity on products from China. Concerning France, the relationship is positive in value but negative in quantity. These two effects combined together result in a weak tax evasion on products imported from France compared to those from China. There is evidence of misclassification only on products imported from France. Keywords: Tax evasion, tax rate, missing imports, misclassification, 1. Introduction In most countries, tax revenue is the greatest source of government revenue (Yalama & Gumus, 2013) and no government can set a tax system and then rely on [...]

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, tabor 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, 042), I. INTRODUCTION The optimal long-run rate of inflation has long been the main concern of monetary policymakers and researchers; see Schmitt-Grohe and Uribe (2011) for an overview. This monetary issue [...]

Canadian provinces are required to phase in a minimum price of CAN $50 per tonne on carbon dioxide emissions by 2022. This paper discusses the rationale for, and design of, the price floor requirement; its (provincial-level) environmental, fiscal, and economic welfare impacts; monitoring issues; and (national-level) industry incidence. The general conclusions that the welfare costs and implementation issues are manageable, and pricing provides significant new revenues. A challenge is that the floor price by itself is well short of what will be needed by 2030 for Canada's Paris Agreement pledge. Keywords: carbon price, price floor, Canada, welfare impacts, incidence, effective carbon price, competitiveness impacts JEL Codes: Q54, Q58, H23, 1. INTRODUCTION One hundred and ninety five parties submitted pledges to reduce carbon dioxide (C[O.sub.2]) and other greenhouse gases (GHGs)--so-called 'Nationally Determined Contributions' (NDCs)--for the 2015 Paris Agreement on climate [...]

What is the most physician friendly state? Every year, our partners at Physicians Practice[R] conduct an analysis of which states are the most physician friendly, using a variety of criteria [...]

Utilizing a natural experiment setting of the 2003 Dividend Tax Cut, this study documents that as the tax rate on dividends drops, corporate payout policy is contingent on firm's growth opportunity, shareholder rights, and their interactions. The study confirms that firms with high shareholder rights act in the interest of the shareholders. It also provides evidence that the 2003 Dividend Tax Cut helps move the cash flow out of the firms with low growth., INTRODUCTION The Job and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) has significantly dropped the tax rate on dividends. Instead of taxing dividends as ordinary income with the highest [...]

I analyze the dynamic effects of tax competition on public budget deficits. I find that stronger tax competition leads to a fiscal deficit bias at the early stages of financial liberalization. When coun tries differ in terms of capital mobility, further liberalization leads to external imbalances and diverging fiscal deficits while corporate tax rates converge. Consistent with theory, I find that stronger tax competition increases deficits in a sample of OECD countries, controlling for tax revenues and other standard determinants of fiscal deficits. (JEL E62, F62), I. INTRODUCTION The effect of financial globalization on the governments' ability to redistribute is an important yet only partially understood issue. Starting in the mid-1980s, deregulation in the financial sector [...]

The purpose of this paper is to discover and understand factors that lead to small and medium-sized enterprises (SMEs) shutdown in transitional economies, such as the economy of Bosnia and Herzegovina (B&H). The paper provides some findings about main influencing factors that lead to SMEs shut down in the first years of operation from entrepreneurs' and managers' perspective and suggests certain measures that should be taken to secure their survival, development and growth. For the purpose of this paper, empirical research was conducted, using stratified sampling of 110 SMEs from Republic of Srpska (49% of B&H territory). The section on methodology explains the entry criteria for the study population and methods of data analysis. Respondents from the research sample identified the following factors as the main obstacles to successful development of their businesses: difficulties in the collection of receivables from debtors, complicated legal procedures that regulate the work and business operations of enterprises, high rates of taxes and contributions on wages, the negative impact of the global economic crisis and expensive and complicated procedures for obtaining loans from commercial banks. Respondents didn't evaluate their personal traits, level of formal and informal knowledge from business management field or lack of entrepreneurial spirit and readiness for being proactive, innovative or risk acceptance as potential causes of business failure. With its limitation, the paper contains novel information and insights about SMEs business obstacles and challenges in economy of Bosnia and Herzegovina as a solid base for more comprehensive future researches. Key words: Small and medium-sized enterprises (SMEs), Entrepreneurship, Transition, Failure, Economic development. Ovim se radom zele otkriti i razjasniti faktori, koji vode prema zatvaranju malih i srednjih poduzeca (MSP) u tranzicijskim gospodarstvima, kao sto je ono u Bosni i Hercegovini (BiH). U radu se izlazu rezultati istrazivanja kljucnih cimbenika, koji vode zatvaranju malih i srednjih poduzeca u prvoj godini poslovanja, i to iz perspektive poduzetnika te menadzera. Predlazu se mjere, kojima bi se moglo osigurati prezivljavanje, razvoj i rast takvih poduzeca. Za potrebe ovog rada, izvrseno je empirijsko istrazivanje 110 MSP iz Republike Srpske (49% BiH). Poglavlje o metodologiji istrazivanja objasnjava kriterije za ulazak u populaciju, koja je obuhvacena studijom i metode analize podataka. Sudionici u istrazivanju utvrdili su sljedece cimbenike kao ogranicenja razvoja svog poslovanja: naplata potrazivanja, slozeni pravni postupci kojima se regulira poslovanje, visoke stope poreza i doprinosa, negativno djelovanje globalne gospodarske krize te slozene i skupe procedure dobivanja kredita od komercijalnih banaka. Sudionici istrazivanja nisu procjenjivali svoje osobne karakteristike, formalno i/ili neformalno poznavanje poslovnog okruzenja, odnosno poduzetnickog duha, proaktivnost, inovativnost, odnosno preuzimanje rizika, kao potencijalne uzroke poslovne propasti. Unutar ogranicenja, u radu se iznose nove informacije i spoznaje o preprekama i problemima MSP-ima u BiH, koja predstavljaju dobru osnovicu za buduca istrazivanja., UDC 005.7:334.722-022.51/.55>(497.6) 1. INTRODUCTION A recent report from the European Commission (2015, p. 6) finds that a minority of SMEs expands their business and the number of employees, with the [...]

Within the literature on the informal sector, there has been numerous research on the impact of labour regulation and the tax rate on productivity on the size of the informal sector (IS) and unemployment. These effects have mostly been analysed with the aid of search and matching models. However, we have observed, that the impact of labour regulation on the size of the informal sector and unemployment rate has not been estimated empirically. On the other hand, the effect of the tax rate on the size of the informal sector has been analysed with the aid of various theoretical and empirical models respectively. Our paper attempts to bridge the gap in the theoretical and empirical literature by demonstrating that a change in firing costs generates a trade off in the decision to operate in the informal sector or become unemployed. However, an increase in the tax rate on production can neutralise the impact of higher firing costs on unemployment. We use a dynamic general equilibrium model to show how a change in firing costs or tax rate affects the incentive of an agent to operate in the informal sector as well as the consequences for unemployment. The model's parameters are calibrated with values used in the general literature to demonstrate analytically the impact of firing costs and the tax rate on the size of the informal sector and unemployment. Our results show that an increase in firing costs decreases the relative size of the IS but raises the unemployment rate. However, a rise in the tax rate increases the relative size of the informal sector but reduces the unemployment rate. Next, we apply panel data analysis to estimate the effect of firing costs and direct tax for a panel of 93 countries between 2000 and 2007. We find that our empirical results are consistent with the results from our theoretical model. Our results reveals how the kind of regulation (labour or non-labour) can have a direct impact on the mobility of factors of production between the formal and informal sector respectively. It also shows how regulatory policy can be refined to maximize the trade-off between the informal sector and unemployment. JEL Classifications: J41, O17 Keywords: Firing cost, Informal sector, Tax burden, Unemployment, Labor regulation, Shadow Economy, INTRODUCTION Our paper estimates the effect of firing costs on the size of the informal sector (IS) and the unemployment rate. We show that higher firing costs has a significant [...]

The root of the Baumol cost disease is higher productivity increases for manufactured goods than for services. The implied increase in relative costs of service production is widely claimed to have devastating implications for the public sector as a provider of tax-financed services such as health, education, and care. To match the increasing costs it appears inevitable that tax rates would be ever increasing. It is shown that this inference does not follow under standard assumptions when accounting explicitly for service provision from both the private and public sectors. Strikingly under assumptions often made in the literature, the welfare maximizing tax rate for a utilitarian policy maker would remain constant despite the Baumol cost disease, and by implication the share of public employment in total employment will remain constant. (JEL H5, H11, O41), I. INTRODUCTION The origin of the Baumol cost disease is lower (none) productivity growth for services than for manufactures (the 'progressive' sector), see Baumol and Brown (1966) and Baumol (1967). [...]

Introduction and summary Fiscal policy describes how the expenditure and revenue decisions of local, state, or federal governments influence economic growth. In this article, we create a comprehensive measure of [...]

We review the empirical literature on competition in source-based taxes on corporate income. Drawing an analogy to the competition models for the goods market indicates how evidence for the existence of tax competition can be provided, and highlights that tax competition can take many forms. With this in mind we classify the empirical literature, and highlight the importance of the measurement of tax rates and openness. Using measures based on the statutory tax system, there is evidence for tax competition mostly in the European Union. In contrast to the view of Gordon (1992) small countries appear to be the leader of the tax competition game. Keywords: tax competition, corporate taxation JEL Codes: H25, H21, I. INTRODUCTION In the last two decades, both policy makers and academics have been increasingly occupied with tax competition. Policy makers have been concerned about a race to the bottom [...]

We review the basics of international tax planning by U.S. multinational corporations (MNCs) and the organizational structures that facilitate such planning. We then discuss the potential impacts that adopting a participation exemption regime (i.e., a territorial tax system) along the lines proposed by Representative Camp could have on a U.S. MNC's worldwide supply chain structure and financing arrangements. We compare the change in a corporation's global accounting effective tax rate under the current U.S. worldwide tax system and four participation exemption options proposed by Representative Camp. Using a hypothetical set of facts representative of a U.S. multinational with highly mobile intellectual property income, we show that the options produce very different accounting effective tax rates and tax revenues received by the U.S. Treasury. We also point out potential tax planning strategies that could be employed pre- and post-effective date of the implementation of a participation exemption system that would change the expected revenue to be received during the transition to such a system. Keywords: international taxation, tax reform, territorial tax system JEL Codes: H25, H26, M41, M48, I. INTRODUCTION The call for international corporate tax reform has gained traction in the past two years, with the chairs of both tax writing committees pledging to craft comprehensive tax [...]

This paper compares the employment growth of states that enacted corporate income tax rate cuts in the past 23 years with those making no changes. Overall employment comparisons from 1990 [...]

We analyze the sustainability of the government's intertemporal budget constraint and the corresponding fiscal reaction function within a nonlinear error-correction framework. Our empirical analysis, based on Italy, provides some evidence that the Italian government is meeting its intertemporal budget constraint. Nevertheless, we show that the burden of correcting budgetary disequilibria is entirely carried out by changes in the average tax rate, with a weakly exogenous government spending, possibly determined by the political process. We also document some rigidities of the tax instrument, in terms of downward inflexibility of the average tax rate with respect to its long-run level. Finally, we provide some evidence in favor of a nonlinear adjustment toward a sustainable long-run equilibrium, as the average tax rate adjusts faster the further away it gets from the equilibrium. By considering the behavior of taxes across the economic cycle, we also provide some evidence of inflexibility of the tax instrument during bad times. (JEL C32, C51, C52, H20, H50), I. INTRODUCTION Fiscal policy sustainability is an important issue for European Union (EU) countries, which are subject to some forms of monitoring of their public finances. The European Stability and [...]

The foreign share of the worldwide income of U.S. multinational corporations (MNCs) has risen sharply in recent years. Data from a panel of 754 large MNCs indicate that the MNC foreign income share increased by 14 percentage points from 1996 to 2004. The differential between a company's U.S. and foreign effective tax rates exerts a significant effect on the share of its income abroad, largely through changes in foreign and domestic profit margins rather than a shift in sales. U.S. foreign tax differentials are estimated to have raised the foreign share of MNC worldwide income by about 12 percentage points by 2004. Lower foreign effective tax rates had no significant effect on a company's' domestic sales or on the growth of its worldwide pre-tax profits. Lower taxes on foreign income do not seem to promote 'competitiveness.' Keywords: multinational corporations, domestic-foreign tar differentials, income shifting, foreign-source income JEL Codes: F23, H25, H32, Since 1996 there has been a significant increase in the share of the worldwide income of U.S. multinational corporations (MNCs) that is declared abroad. In a linked sample of large [...]

This article investigates the cyclical properties of the average effective tax rate in 26 OECD countries over 1965-2003 to test the validity of three theories of fiscal policy: (i) the standard Keynesian theory, which recommends that tax policy should be countercyclical: (ii) the Tax Smoothing hypothesis, which implies that changes in GDP should be uncorrelated with tax rates: and (iii) the positive theory of Battaglini and Coate (2008), which predicts the average tax rate should be negatively correlated with GDP. Our main finding is that the correlations of tax rates with cyclical GDP are generally quite small and statistically indistinguishable from zero. This finding is quite robust and is more consistent with the implications of the Tax Smoothing hypothesis than either the recommendations of the standard Keynesian model or predictions of the political economy theory of Battaglini and Coate. JEL Classification: E62, E32, 1. Introduction Is fiscal policy procyclical? Should it be? The standard Keynesian model implies that fiscal policy should be countercyclical, that is, government spending should increase in economic contractions and [...]

We show that firms successfully attempt to time exchangeable debt offerings. A firm that issues exchangeable debt gives the bondholders the option to exchange their bonds for shares of the underlying firm in which the issuing firm has a stake. Companies tend to raise cash with exchangeable debt soon after the underlying stock has appreciated, but issuers expect deterioration in the future performance of the underlying firm. The price of the underlying asset falls after the exchangeable debt is issued. An exchangeable debt issue also signals the prospective open market sale of the underlying shares by the issuer., Introduction Exchangeable debt is bonds issued by one company that are convertible into common shares of a second company (hereafter the underlying firm) in which the issuing firm has a [...]

In this paper, we study the impacts of a set of China's export-oriented tax and tariff rules on the optimal supply chain design and operations for a firm that produces [...]

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1475-4932.2010.00654.x Byline: RATBEK DZHUMASHEV (1), EMIN GAHRAMANOV (2) Keywords: H26; D91; O41 Abstract: We develop an endogenous growth model a la Barro (1990), augmented with income tax evasion. Unlike many traditional rational choice models of tax evasion, the numerical simulations of our model do not produce counter-intuitive results. Further, we show that: (i) accounting for evasion costs (while capturing the full risk associated with the tax evasion process) is important for obtaining realistic relationships between key model variables; (ii) productive government expenditures explicitly affect the economy's tax evasion rate; (iii) Barro's natural efficiency condition for setting the optimal statutory tax rate holds even in the presence of tax evasion; (iv) given realistic estimates of the public expenditure externality, the average marginal income tax rate in Australia is not too far away from the optimal one; and (v) differences in tax evasion opportunities aggravate inequality over time. Author Affiliation: (1)Department of Economics, Monash University, Berwick, Victoria, Australia (2)School of Accounting, Economics and Finance, Deakin University, Burwood, Victoria, Australia Article note: Emin Gahramanov, School of Accounting, Economics and Finance, Deakin University Burwood campus, 70 Elgar Road, Melbourne, VIC 3125, Australia. Email: eming@deakin.edu.au

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1468-2354.2010.00611.x Byline: Thomas Aronsson ([dagger]), Olof Johansson-Stenman (1) Abstract: This article concerns optimal income taxation under asymmetric information in a two-type OLG model when individuals' relative consumption matters. Positional concerns affect the policy choices via two channels: (i) the average degree of positionality and (ii) positionality differences between the low-ability type and the mimicker. Under plausible empirical estimates, the marginal labor income tax rates become substantially larger, and the absolute value of the marginal capital income tax rate of the low-ability type becomes substantially smaller, than in the conventional model. In addition to measures of reference consumption based on average consumption, we also address within-generation and upward comparisons. Author Affiliation: ([dagger])Umea University, Sweden; University of Gothenburg, Sweden

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1540-5982.2010.01610.x Byline: Karen Pittel (1), Lucas Bretschger (1) Keywords: O4; O41; Q01; Q3 Abstract: Abstract. We analyze the long-term dynamics of an economy in which sectors are heterogeneous with respect to the intensity of natural resource use. It is shown that heterogeneity induces technical change to be biased towards resource-intensive sectors. Along the balanced growth path, the sectoral structure of the economy is constant as the higher resource dependency in resource-intensive sectors is compensated by enhanced research activities. Resource taxes have no impact on dynamics except when the tax rate varies over time. Research subsidies and the sectoral provision of productivity-enhancing public goods raise growth and provide an effective tool for structural policy. Abstract (Spanish): Les implications de l'heterogeneite des intensites dans l'usage des ressources naturelles sur le changement technique et la croissance. On analyse la dynamique a long terme d'une economie dans laquelle les secteurs sont heterogenes pour ce qui est de l'intensite dans l'usage des ressources naturelles. On montre que cette heterogeneite engendre un changement technique biaise dans la direction des secteurs a forte intensite dans l'usage de la ressource naturelle. Le long d'un sentier de croissance balancee, la structure sectorielle de l'economie est constante a proportion que la dependance plus grande de la ressource dans les secteurs a forte intensite d'utilisation de la ressource est compensee par des activites de recherche plus importantes. Les taxes sur la ressource n'ont pas d'effet sur la dynamique si ce n'est quand les taux de taxation varient dans le temps. Les subventions a la recherche et la production de biens publics qui renforcent la productivite sectorielle augmentent la croissance et sont un outil efficace de politique structurelle. Author Affiliation: (1)Center of Economic Research, ETH Zurich

The effects of demographics on the mix of tax rates on labor and capital are examined. The younger US voting-age population in 1990 compared to 1965 has explained for the decline in relative capital tax rate between those two years. The younger population has increased net return to capital, led voters to increase their savings, and resulted in preference for lower taxes on capital.

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1468-0297.2009.02333.x Byline: Teresa Garcia-Mila (1), Albert Marcet (2), Eva Ventura (3) Abstract: We evaluate the effect on welfare of shifting the burden of capital income taxes to labour taxes in a dynamic equilibrium model with heterogeneous agents and constant tax rates. We calibrate and simulate the economy; we find that lowering capital taxes has two effects: it increases efficiency in terms of aggregate production and it redistributes wealth in favour of those agents with a low wage/wealth ratio. When the parameters of the model are calibrated to match the distribution of income in terms of the wage/wealth ratio, the redistributive effect dominates, and agents with a high wage/wealth ratio would experience a large loss in utility if capital income taxes were eliminated. Author Affiliation: (1)Universitat Pompeu Fabra and Barcelona GSE (2)Universitat Autonoma de Barcelona, CEPR and Barcelona GSE (3)Universitat Pompeu Fabra and Barcelona GSE Article History: Submitted: 30 July 2008 Accepted: 28 May 2009

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1540-5982.2009.01570.x Byline: Celine Azemar (1) Keywords: F23; H25; H32 Abstract: Abstract. This paper explores the effects of corporate taxation on U.S. capital invested abroad and on tax planning practices. The econometric analysis first indicates that investment is strongly influenced by average tax rates, with a magnified impact particularly for low-tax rates, implying that the attractiveness of low-tax countries is not weakened by anti-deferral rules and cross-crediting limitations. Further explorations suggest that firms report higher profit, higher Subpart F income, and are less likely to repatriate dividends when they are located in low-tax jurisdictions. Finally, when the role of effective transfer pricing regulations is estimated, it appears that low degrees of law enforcement are associated with higher income shifting. Abstract (Spanish): Fiscalite internationale et comportment des firmes multinationales americaines: une approche integree. Ce memoire s'interesse aux effets des impots sur le revenu des societes sur l'investissement et les pratiques de planifications fiscales des firmes multinationales americaines. L'analyse econometrique indique que l'investissement americain est fortement influence par le taux d'imposition moyen et que cet impact est sensiblement plus important pour de faibles taux d'imposition. Ceci suggere que l'attractivite des pays a faible imposition n'est pas affaiblie par les limites imposees par le systeme fiscal americain sur la possibilite de differer l'impot et sur les moyennes de credit. Des tests additionnels montrent que les firmes reportent un profit ainsi qu'un revenu 'Subpart F' plus important et rapatrient moins leurs dividendes lorsqu'elles sont localisees dans des pays a faible imposition. Finalement, en estimant le role joue par l'efficacite des reglementations en termes de prix de transferts, il apparait qu'un faible etat de droit est associea de plus fortes manipulations fiscales. Author Affiliation: (1)Department of Economics, University of Glasgow

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1540-5907.2009.00415.x Byline: Douglas A. Hibbs (1), Violeta Piculescu (2) Abstract: How do government-supplied institutional benefits and the taxation and regulation of producers affect the propensity of private firms to enter the unofficial economy and evade taxation? We propose a model in which the incentive of firms to operate underground depends on tax rates relative to firm-specific thresholds of tax toleration that are decisively affected by quality of governance-in particular by the presence of high-grade institutions delivering services enhancing official production that anchor profit-maximizing firms to the official economy. Some key predictions of the model concerning the determinants of firms' tax toleration and tax compliance receive broad support from empirical analyses of enterprise-level data from the World Bank's World Business Environment Surveys. Author Affiliation: (1)Gothenburg University (2)Gothenburg University Article note: Douglas A. Hibbs, Jr., is emeritus Professor of Economics and Senior Research Associate at the Center for Public Sector Research (CEFOS), Gothenburg University, 40530 Gothenburg, Sweden (douglas@douglas-hibbs.com). Violeta Piculescu is a PhD in Economics from Gothenburg University, 40530 Gothenburg, Sweden (violeta.piculescu@gmail.com).

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2008.12.012 Byline: Zu-Hsu Lee (a), Shiming Deng (b), Beixin Lin (c), James G.S. Yang (c) Keywords: OR in strategic planning; Nonlinear programming; Income tax; Investment interest expense; Linear programming Abstract: Investment income tax planning requires informed, strategic choices. One must determine the amount of qualified dividends and net long-term capital gain to be included in investment income (against which investment interest expense can be deducted). This choice also determines the residual qualified dividends and net long-term capital gain which enjoy a reduced tax rate. Another important decision is whether all or some of this interest expense should be deducted in the current year or carried forward. This paper puts forward a new approach to formulate these questions as a generalized resource allocation problem which permits analysis of the interdependence between, and the tax consequences of, the above decisions. The commonly used approach - deducting investment interest expense sooner rather than later - we consider myopic since the benefit of deferring some of the deduction is not leveraged. Presented here is a tax planning guideline (a necessary and sufficient condition for optimality) to realize a more forward-looking strategy. We also show that, for certain income structures, the tax savings by deducting a one-dollar investment interest expense may be more than the tax rate on the dollar of investment income that is offset. Author Affiliation: (a) School of Management, Marist College, Poughkeepsie, NY 12601, United States (b) School of Management, Huazhong University of Science and Technology, Wuhan 430074, PR China (c) Department of Accounting, Law and Taxation, Montclair State University, Montclair, NJ 07043, United States Article History: Received 15 October 2006; Accepted 8 December 2008

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1475-4932.2009.00592.x Byline: ANN HARDING (1), QUOC NGU VU (1), ALICIA PAYNE (1), RICHARD PERCIVAL (1) Keywords: H20; H24; H53; I38; J16 Abstract: This article reviews trends in effective marginal tax rates (EMTRs) from 1996-1997 to 2006-2007 for working-age Australians. Although sweeping income tax cuts reduced effective tax rates for many taxpayers, the extension of income-tested welfare payments and tax concessions worked in the opposite direction. The proportion of working-age Australians facing EMTRs of more than 50 per cent increased during the period, from 4.8 to 7.1 per cent, representing some 910,000 Australians. This article also provides the first international comparisons of how the distribution of EMTRs for earners in Australia compares with those prevailing in Europe. Author Affiliation: (1) National Centre for Social and Economic Modelling, University of Canberra, Canberra, Australia Article note: Ann Harding, NATSEM, University of Canberra, ACT 2601, Australia. Email: ann.harding@canberra.edu.au