Week 1
Why tax in general? 1. The provision of public goods (revenue for government)
2. The distribution of resources
3. Economic stabilization (during recession boost
expenditures)
Two main goals when Equity tax system is fair
designing the tax system Efficiency will not distort the behavior of individuals
MNE International corporation whose business activities are spread
among at least two countries + have centralized headquarters
which coordinates global management. If a foreign company
invests in at least 10% of the stock of a subsidiary.
Why tax firms? 1. Benefit principle like individuals, companies benefit
from the public goods produced by the state
2. Avoiding the erosion of personal income tax if
companies are not taxed, individuals would all tend to
become companies
3. Political constraints large firms are often not well-
perceived by society which justifies taxation
Evolution of tax rates Corporate tax rates decreased in the last decades, for all types of
countries
Nominal (statutory) tax rate Rate imposed by law on taxable income that falls within a given
bracket
Effective tax rate Percentage of income that is actually paid by an individual or
company after taking into account tax breaks
They differ from each other: Because of special concessions, credits, exemptions, incentives,
and exclusions granted for economic reasons
Statutory tax rates decreased The decrease was larger for small countries because of tax
competition. Small countries need to attract companies and
activities and therefore have a strategy to lower tax rates
(asymmetric incentives)
Tax competition The uncooperative setting of source based taxes on corporate
income where the country is restrained by the tax setting
behavior of other countries. Countries have to compete with each
other in order to get companies to incorporate and operate
within their boundaries
Race to the bottom - If firms can freely choose their location, then they would
choose the country with lowest tax rate
- Governments anticipate that and lower their tax rates if
other countries do so
Academic research on Test whether corporate tax rate in one country is influenced by
strategic interaction the taxes in other countries. Result: strategic interaction in
statutory tax rates is positive and significant
Effect tax competition It does not seem to reduce government expenditures. Why?
Corporate taxes make up only a relatively small share in total
government revenues (10%). But, it does affect tax structure: it
reduces corporate tax rates and increases tax rates on labor and
, consumption
Conclusion Decreasing income tax rates is a way for governments to attract
firms and thus profits in their country tax havens
Tax haven A country that imposes low or even no taxes on income or gains.
Characteristics: secrecy, favorable disposition to foreign capital,
provision of offshore banking facilities, good communication
facilities, political stability
Types of tax havens 1. Production = where real activity is transferred, tangible
value added (Ireland)
2. Base = charging little or no tax (Caribbean, Pacific)
3. Treaty = favorable networks of DTT (Netherlands)
4. Concessions = offering particular tax incentives or benefits
(Netherlands)
In the US - 50% of foreign profits come from tax havens, at first only
20% the number of tax havens increased
- Subsidiaries from US firms paid lower tax over time
they moved to tax havens with lower taxes
- They did not move workers there, not more tangible
capital (such as machines), but increased their pre-tax
profits! Not more production, but profit shifting
Economic profit The residual profit after payment of all input costs at their market
price
Taxable profit Capital is dealt with differently than for eco profit:
Overall price of capital rK is not included
But price of debt is included (deducted from profit)
Equity is not included (not deducted from profit)
Tax income > eco profit
Progressive taxation Rate increases with taxable income
Who pays corporate tax? Obvious answer: firms
But, introduction of tax on ‘taxable profit’ can have
consequences:
- It may reduce remuneration of shareholders
- It can be passed on in sales prices and therefore borne by
consumers (VAT)
In the long term:
- Impact on labor productivity and on wages
- Impact financing decisions of companies
No answer, must be studied market by market
Tax planning Making sure to pay the lowest amount of tax possible (even state
owned companies do this)
Net present value Can be used to measure the profitability of real investments
Cash flows Money generated from making investments during a specific time
period
Why divide by the market 1$ today could be invested in the market and would earn $ 1 x
rate interest i? (1+i) tomorrow. And the other way around 1$ tomorrow is worth
$ 1 / (1+i) today one always prefers to have $100 today than
tomorrow
, Low effective tax rates (for - Lot of oversea earnings from countries with lower rates
US firms) - Business is built around intangible assets which are moved
easily
Types of tax haven lists Governmental qualitative, and non-governmental qualitative /
quantitative
The EU list Governmental qualitative with 3 criteria
1. Tax transparency
2. Fair taxation (according to Oxfam Ireland, Luxembourg,
Netherlands, and Malta fail this one)
3. Implementation of anti-BEPS measures
Why are tax havens usually ➔ Developmental strategy of small countries which have no other
small countries? means to attract businesses (because no infrastructure, no skilled
workforce etc)
➔ In large countries, governments need to collect taxes to sustain
public expenditures and infrastructure. There is less
infrastructure to be sustained in small countries
Tax incidence Assessing which party (consumers or producers) bear the true
burden of tax it falls on the most inelastic factor
Inelastic / elastic If the curve is vertical: I from inelastic, if the curve is horizontal: E
from elastic
Drawbacks of tax - Beggar thy neighbor system: tax competition puts undue
competition pressure on the governments to keep reducing their tax
rates to unreasonable levels. A country does not have the
option to avoid tax competition if its peers are indulging in
it. The real winner is the MNE
- Lower levels of services offered: less tax income means
cutting expenditures. But cannot cut in infrastructure or
services that MNEs require, thus cut in education / health
facilities etc.
- Burden falls on the poor: if they do not cut in services,
then forced to levy more tax on workers
- Mobile capital: tax competition also prevents companies
from investing their wealth in immovable assets.
Multinational companies generally want to own assets
that are movable or liquid
- Rich get richer: any benefits that accrue because of tax
competition are not split amongst the population
Potential advantages of tax - Rationalization of government expenditures: no
competition unlimited budget so they have to be lean, no room for
personal political gains
- Better services: companies look at countries where they
can get the best value for money. They may choose for a
country with a higher tax rate if that means getting access
to better public services
- Increases economic productivity: corporate taxes can
essentially be seen as transaction costs that hinder the
economic activity in the country
Why tax in general? 1. The provision of public goods (revenue for government)
2. The distribution of resources
3. Economic stabilization (during recession boost
expenditures)
Two main goals when Equity tax system is fair
designing the tax system Efficiency will not distort the behavior of individuals
MNE International corporation whose business activities are spread
among at least two countries + have centralized headquarters
which coordinates global management. If a foreign company
invests in at least 10% of the stock of a subsidiary.
Why tax firms? 1. Benefit principle like individuals, companies benefit
from the public goods produced by the state
2. Avoiding the erosion of personal income tax if
companies are not taxed, individuals would all tend to
become companies
3. Political constraints large firms are often not well-
perceived by society which justifies taxation
Evolution of tax rates Corporate tax rates decreased in the last decades, for all types of
countries
Nominal (statutory) tax rate Rate imposed by law on taxable income that falls within a given
bracket
Effective tax rate Percentage of income that is actually paid by an individual or
company after taking into account tax breaks
They differ from each other: Because of special concessions, credits, exemptions, incentives,
and exclusions granted for economic reasons
Statutory tax rates decreased The decrease was larger for small countries because of tax
competition. Small countries need to attract companies and
activities and therefore have a strategy to lower tax rates
(asymmetric incentives)
Tax competition The uncooperative setting of source based taxes on corporate
income where the country is restrained by the tax setting
behavior of other countries. Countries have to compete with each
other in order to get companies to incorporate and operate
within their boundaries
Race to the bottom - If firms can freely choose their location, then they would
choose the country with lowest tax rate
- Governments anticipate that and lower their tax rates if
other countries do so
Academic research on Test whether corporate tax rate in one country is influenced by
strategic interaction the taxes in other countries. Result: strategic interaction in
statutory tax rates is positive and significant
Effect tax competition It does not seem to reduce government expenditures. Why?
Corporate taxes make up only a relatively small share in total
government revenues (10%). But, it does affect tax structure: it
reduces corporate tax rates and increases tax rates on labor and
, consumption
Conclusion Decreasing income tax rates is a way for governments to attract
firms and thus profits in their country tax havens
Tax haven A country that imposes low or even no taxes on income or gains.
Characteristics: secrecy, favorable disposition to foreign capital,
provision of offshore banking facilities, good communication
facilities, political stability
Types of tax havens 1. Production = where real activity is transferred, tangible
value added (Ireland)
2. Base = charging little or no tax (Caribbean, Pacific)
3. Treaty = favorable networks of DTT (Netherlands)
4. Concessions = offering particular tax incentives or benefits
(Netherlands)
In the US - 50% of foreign profits come from tax havens, at first only
20% the number of tax havens increased
- Subsidiaries from US firms paid lower tax over time
they moved to tax havens with lower taxes
- They did not move workers there, not more tangible
capital (such as machines), but increased their pre-tax
profits! Not more production, but profit shifting
Economic profit The residual profit after payment of all input costs at their market
price
Taxable profit Capital is dealt with differently than for eco profit:
Overall price of capital rK is not included
But price of debt is included (deducted from profit)
Equity is not included (not deducted from profit)
Tax income > eco profit
Progressive taxation Rate increases with taxable income
Who pays corporate tax? Obvious answer: firms
But, introduction of tax on ‘taxable profit’ can have
consequences:
- It may reduce remuneration of shareholders
- It can be passed on in sales prices and therefore borne by
consumers (VAT)
In the long term:
- Impact on labor productivity and on wages
- Impact financing decisions of companies
No answer, must be studied market by market
Tax planning Making sure to pay the lowest amount of tax possible (even state
owned companies do this)
Net present value Can be used to measure the profitability of real investments
Cash flows Money generated from making investments during a specific time
period
Why divide by the market 1$ today could be invested in the market and would earn $ 1 x
rate interest i? (1+i) tomorrow. And the other way around 1$ tomorrow is worth
$ 1 / (1+i) today one always prefers to have $100 today than
tomorrow
, Low effective tax rates (for - Lot of oversea earnings from countries with lower rates
US firms) - Business is built around intangible assets which are moved
easily
Types of tax haven lists Governmental qualitative, and non-governmental qualitative /
quantitative
The EU list Governmental qualitative with 3 criteria
1. Tax transparency
2. Fair taxation (according to Oxfam Ireland, Luxembourg,
Netherlands, and Malta fail this one)
3. Implementation of anti-BEPS measures
Why are tax havens usually ➔ Developmental strategy of small countries which have no other
small countries? means to attract businesses (because no infrastructure, no skilled
workforce etc)
➔ In large countries, governments need to collect taxes to sustain
public expenditures and infrastructure. There is less
infrastructure to be sustained in small countries
Tax incidence Assessing which party (consumers or producers) bear the true
burden of tax it falls on the most inelastic factor
Inelastic / elastic If the curve is vertical: I from inelastic, if the curve is horizontal: E
from elastic
Drawbacks of tax - Beggar thy neighbor system: tax competition puts undue
competition pressure on the governments to keep reducing their tax
rates to unreasonable levels. A country does not have the
option to avoid tax competition if its peers are indulging in
it. The real winner is the MNE
- Lower levels of services offered: less tax income means
cutting expenditures. But cannot cut in infrastructure or
services that MNEs require, thus cut in education / health
facilities etc.
- Burden falls on the poor: if they do not cut in services,
then forced to levy more tax on workers
- Mobile capital: tax competition also prevents companies
from investing their wealth in immovable assets.
Multinational companies generally want to own assets
that are movable or liquid
- Rich get richer: any benefits that accrue because of tax
competition are not split amongst the population
Potential advantages of tax - Rationalization of government expenditures: no
competition unlimited budget so they have to be lean, no room for
personal political gains
- Better services: companies look at countries where they
can get the best value for money. They may choose for a
country with a higher tax rate if that means getting access
to better public services
- Increases economic productivity: corporate taxes can
essentially be seen as transaction costs that hinder the
economic activity in the country
