Taxing, spending, and inequality

Benedict Clements, David Coady, Ruud de Mooij, Sanjeev Gupta, 15 April 2014

The causes and consequences of rising inequality have stirred a lively debate on appropriate policy responses. This column reviews how governments have successfully used fiscal policy to address distributive concerns. It also examines the policy alternatives that countries can pursue in order to reduce income and wealth inequality at a minimum cost to efficiency. Such policies include exploitation of property taxes, reductions in tax deductions that favour upper-income groups, investing in increasing the human capital of low-income groups, and reforming social benefits.

Thin capitalisation rules and corporate leverage

Jennifer Blouin, Harry Huizinga, Luc Laeven, Gaëtan Nicodème, 29 March 2014

Multinationals take advantage of heterogeneity in tax deduction rules by reallocating debt to high-tax countries. This reduces tax revenue and distorts the trade-off between debt and equity financing. Some countries have enacted thin capitalisation rules that restrict deductibility when the debt-to-leverage ratio exceeds a certain threshold. This column provides evidence that such rules are only effective when restrictions are automatic, rather than allowing for government discretion.

Tax evasion and austerity-plan failure

Francesco Pappadà, Yanos Zylberberg, 3 February 2014

Greece’s austerity package included an unprecedented increase in the VAT rate, but the resulting increase in revenue was much lower than expected. This column links this disappointing result to the ‘transparency response’ of firms to higher tax rates. In countries like Greece with poor tax monitoring, firms face a tradeoff when deciding whether to declare their activity. Transparency is a necessary condition for accessing external finance, but it also means having to pay tax. Improving credit conditions for small and medium-size Greek firms might shift this tradeoff in favour of transparency.

The win-win from eliminating corporate income taxes

Laurence J. Kotlikoff, 14 January 2014

Though taxing corporations may be a political no-brainer, it may be a big economic mistake. This column discusses recent research showing that the tax is not paid primarily by rich corporate shareholders. They can, and do, move their capital away from countries that have high corporate rates. Eliminating the US corporate tax by, for example, taxing accrued global corporate profits as personal income can produce dramatic increases in US investment, output, real wages, and saving. Modest gains accrue to early generations with very sizable gains going to young and future generations, both skilled and unskilled.

Transaction tax cuts as effective fiscal stimulus

Michael Best, Henrik Kleven, 19 December 2013

The housing market is a key link between the financial economy and the real economy. Since the onset of the Great Recession, there has been renewed interest in understanding the role of the housing market in the financial crisis. This column shows that transaction taxes introduced in the UK in 2008 had a strong effect on prices and demand in the housing market. Transaction tax cuts were enormously successful at stimulating the housing market during the recession. The effects on real expenditure per dollar of foregone tax revenue were significantly larger than for typical fiscal stimulus policies such as income tax rebates.

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