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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). [...]

We study and compare two taxation schemes (based on a single tax rate and a progressive tax rate respectively) within the framework of the Ramsey-Solow model. Bibliography: 6 titles. Illustrations: 3 figures., UDC 330.115:519.83 In this paper, we consider two taxation schemes: 1) a single tax rate (the Flat rate tax scheme) 2) a linearly increasing tax rate (a counterpart of the [...]

I examine how taxes and tax progressivity affect two different types of entrepreneurship--established business ownership and nascent entrepreneurship--in a large group of Organization for Economic Co-operation and Development countries, using 2000-2009 macro-level Global Entrepreneurship Monitor data. Empirical evidence from Arellano-Bond generalized method of moments estimation suggests that higher tax progressivity exerts a negative influence on nascent enterprises but appears to have no impact on established business ownership. Changes in marginal and average tax rates are found to have no significant influence on either type of entrepreneurship. The most important contribution of the article is the comparison of tax impacts on actual and nascent entrepreneurship rates. (JEL H24, H29, M13, M19), I. INTRODUCTION In recent years, there have been heated debates in the United States (1) and some European Union countries about taxation and economic growth. There are people who believe [...]

This article examines the determinants of local tax rates. For the two main local taxes in Spain--the property tax and the motor vehicle tax--we test the existence of tax mimicking, yardstick competition, and political trends in a sample of 2,713 municipalities. Using various spatial models, the results support the hypothesis of tax mimicking, with coefficients above 0.40. We also show the relevance of political variables such as the ideology of incumbents and political fragmentation. The fact that incumbents with weaker political support exhibit stronger mimicking behavior is interpreted as evidence in favor of yardstick competition. Finally, we find that incumbents mimic neighboring municipalities ruled by the same political party, confirming the political trends hypothesis. (JEL C31, H71, H77), I. INTRODUCTION Local tax rates are determined by a wide range of economic and political factors, both internal and external to a municipality. Among the external factors are changes in [...]

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 [...]

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 [...], 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

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 [...]

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 [...], 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

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.1467-9957.2009.02150.x Byline: TSUYOSHI TOSHIMITSU (1) Abstract: Based on a model of environmental quality differentiated products, we explore how an emission tax charged on consumers who choose an environment-unfriendly good, i.e. a consumer-based emission tax policy, affects the unit emission level of the product, the environment, and consumer and producer surplus. Then, we analyse the conditions for an optimal consumer-based emission tax rate to exist and the properties of the optimal tax rate. We address these issues in the case of a partial coverage market with a Bertrand duopoly. Furthermore, we discuss some of the assumptions of the model. Author Affiliation: (1)Kwansei Gakuin University

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.childyouth.2010.07.026 Byline: Michael J. MacKenzie, David J. Tucker Keywords: Infant mortality; Child death rate; Disconnected youth; Taxation; Tax freedom day Abstract: Each year the Tax Foundation releases rankings of U.S. states on time to Tax Freedom, or the day that the average taxpayer has met their tax burden. The current analysis sought to contextualize the tax freedom day rankings, by examining the association between state tax burden and key indicators of child wellbeing. The 2009 measure of days to tax freedom by state was correlated with ten key indicators of child wellbeing from the Casey Foundation's KIDS COUNT 2009 data. Each of the wellbeing indicators and the overall composite wellbeing rankings were also regressed on days to Tax Freedom and Gross State Product. As the days to tax freedom decrease, indicating a lighter tax burden, all of the following increase significantly -- the infant mortality rate, child and teen death rates, teen birth rate, rates of school dropout and disconnected youth, and numbers of children in poverty. These findings all held even after controlling for Gross State Product. Public attitudes and choices about paying taxes have important consequences for the health of children in our society. The broad appeal of Tax Freedom Day highlights a disconnect between the act of paying taxes and recognition of the benefits to children those taxes provide. Article History: Received 13 May 2010; Revised 23 July 2010; Accepted 28 July 2010

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmateco.2010.08.005 Byline: Stefano Bosi (a), Thomas Seegmuller (b) Keywords: Progressive taxation; Heterogeneous agents; Borrowing constraint; Endogenous labor supply; Steady state allocation; Macroeconomic stability Abstract: The aim of this paper is to study the role of progressive tax rules on the steady state and the stability properties in a Ramsey economy with heterogeneous households and borrowing constraints. Since labor supply is elastic, considering different tax rates on capital and labor incomes matters. Showing the existence of steady states where only the most patient households hold capital, we argue that working could not be optimal for them. Dynamics are addressed through a local analysis. In contrast to many contributions, progressive tax rules can promote expectation-driven fluctuations and endogenous cycles. Hence, progressivity can be an inopportune device to stabilize macroeconomic volatility. Author Affiliation: (a) THEMA, Universite de Cergy-Pontoise, 33 boulevard du Port, 95011 Cergy-Pontoise Cedex, France (b) CNRS and GREQAM, Centre de la Vieille Charite, 2 rue de la Charite, 13236 Marseille Cedex 02, France Article History: Received 20 May 2009; Revised 4 August 2010; Accepted 4 August 2010 Article Note: (footnote) [star] This work was supported by French National Research Agency Grant (ANR-05-BLAN-0347-01). Part of this research has been done when Stefano Bosi was at the University of Lille 1 and Thomas Seegmuller at the Paris School of Economics. We would like to thank an anonymous referee for his helpful comments and the participants of the workshop 'Growth with Heterogeneous Agents: Causes and Effects of Inequality' held in Marseille on June 2008, of the Public Economic Theory conference held in Seoul on June 2008, of the 'First Workshop on Dynamics, Optimal Growth and Population Change: Theory and Applications' held in Milan on September 2008 and of the Western Economic Association International conference held in Kyoto on March 2009. This paper also benefits from suggestions by Carine Nourry. All remaining errors or omissions are our own.

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

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jpubeco.2010.04.006 Byline: Hubert Kempf (a), Gregoire Rota-Graziosi (b) Keywords: Endogenous timing; Tax competition; First/second-mover advantage; Strategic complements; Stackelberg; Risk-dominance Abstract: In this paper we extend the standard approach of horizontal tax competition by endogenizing the timing of decisions made by the competing jurisdictions. Following the literature on the endogenous timing in duopoly games, we consider a pre-play stage, where jurisdictions commit themselves to move early or late, i.e. to fix their tax rate at a first or second stage. We highlight that at least one jurisdiction experiments a second-mover advantage. We show that the Subgame Perfect Equilibria (SPEs) correspond to the two Stackelberg situations yielding to a coordination problem. In order to solve this issue, we consider a quadratic specification of the production function, and we use two criteria of selection: Pareto-dominance and risk-dominance. We emphasize that at the risk-dominant equilibrium the less productive or smaller jurisdiction leads and hence loses the second-mover advantage. If asymmetry among jurisdictions is sufficient, Pareto-dominance reinforces risk-dominance in selecting the same SPE. Three results may be deduced from our analysis: (i) the downward pressure on tax rates is less severe than predicted; (ii) the smaller jurisdiction leads; (iii) the 'big-country-higher-tax-rate' rule does not always hold. Author Affiliation: (a) Paris School of Economics and Banque de France, France (b) CERDI-CNRS, Universite d'Auvergne, France Article History: Received 23 September 2009; Revised 24 February 2010; Accepted 19 April 2010

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jedc.2010.06.017 Byline: Lorenzo Forni (a)(b), Andrea Gerali (b), Massimiliano Pisani (b) Abstract: We simulate a currency union dynamic general equilibrium model to assess the macroeconomic implications of permanently reducing the public debt-to-gross domestic product (GDP) ratio in euro area countries. We obtain the following results. First, tax distortions are quantitatively significant. Second, the best fiscal consolidation strategy is to permanently reduce both expenditures and tax rates. Third, under such a consolidation strategy the transition is generally not costly, as the GDP and investment would grow, while private consumption would not fall. Finally, spillovers to the rest of the euro area are generally expansionary. Author Affiliation: (a) International Monetary Fund, Washington, DC, USA (b) Bank of Italy, Forecasting and Modeling Division, Italy

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1475-5890.2010.00113.x Byline: Ludger Linnemann ([dagger]) Keywords: tax policy; unemployment; labour market frictions; Laffer curve; government spending; growth Abstract: Abstract The paper studies the effects of income tax rate changes in a general equilibrium model with frictional unemployment. Laffer curve effects, by which a tax rate reduction may increase the level of government spending or its share in output, are shown to be possible under certain conditions. These are the presence of unemployment benefit payments, government budget balance through fiscal spending adjustment and limited quantitative importance of labour reallocation costs. Endogenous government spending acts as a fiscal accelerator if the fiscal burden of unemployment benefit payments is large, but reduces the employment effects of tax rate cuts if it is low. Author Affiliation: ([dagger])Technical University of Dortmund (ludger.linnemann@tu-dortmund.de)

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jet.2009.09.003 Byline: Borys Grochulski (a), Tomasz Piskorski (b) Keywords: Optimal taxation; Private information; Human capital; Deferred tax Abstract: We study the structure of optimal wedges and capital taxes in a dynamic Mirrlees economy with endogenous distribution of skills. Human capital is a private, stochastic state variable that drives the skill process of each individual. Building on the findings of the labor literature, we construct a tractable life-cycle model of human capital evolution with risky investment and stochastic depreciation. In this setting, we demonstrate the optimality of (a) a human capital premium, i.e., an excess return on human capital relative to physical capital, (b) a large intertemporal wedge early in the life-cycle, and (c) a non-zero intratemporal wedge even at the top of the skill distribution at all dates except the last date in the life-cycle. The main implication for the structure of optimal linear capital taxes is the necessity of deferred taxation of physical capital. The average marginal tax rate on physical capital held in every period is zero in present value. However, expected capital tax payments do not equal zero in every period. Necessarily, agents face negative expected capital tax payments early in the life-cycle and positive expected capital tax payments late in the life-cycle. Author Affiliation: (a) Federal Reserve Bank of Richmond, United States (b) Columbia University, Columbia Business School, Broadway 3022, Uris Hall 810, New York, NY 10027, United States Article History: Received 28 December 2007; Revised 12 June 2009; Accepted 30 August 2009 Article Note: (footnote) [star] The views expressed here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.