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Gone with the windfall
(2018)
Due to the debate about the generosity of LTC insurance benefits the German government decided to increase benefits and widen the circle of LTC beneficiaries with the Second LTC Strengthening Act. In this paper, we evaluate the long-term implications of this recent reform for the German LTC insurance scheme. Using the framework of generational accounting we show that the reform has led to a widening of the short-term gap between revenues and expenditure and that the LTC insurance is not sustainably financed, neither pre- nor post-reform. By the early 2020s there will be fiscal pressure for further reforms. From an intergenerational perspective, the reform can be seen as a windfall to current beneficiaries increasing the intergenerational redistribution through the pay-as-you-go system.
Delegated monitoring
(2012)
To highlight the value of delegated monitoring through bond trustees, we examine the high-yield corporate bond market where default risk is high, covenants are numerous, and market values are particularly sensitive to wealth transfers. We show that bond trustees that also act as underwriters in the low-grade bond segment, but not the market’s largest trustees, reduce firms’ at-issue bond yields by 33 to 40 basis points. Accordingly, we report significantly lower bond default and downgrade risks associated with superior monitoring by these trustees. These pricing effects remain when we control for self-selection and do not hinge on whether we solely consider trustee identity or interaction terms of trustees with covenant variables that measure necessary monitoring effort. Our results can be interpreted as evidence for informational and reputational spillover effects of banks providing several services in the high-yield market segment.
This paper tests the effect of dividend taxation on employment. Since dividend taxation affects real investments, tax-induced changes in real investments should map into employment effects. Using a difference-in-difference approach around the Swedish 2006 dividend tax cut and unique corporate-level data with income tax information on every employee, we find robust evidence of dividend tax-induced employment effects. In response to the dividend cut, both employment and wage levels increase in cash-constrained firms relative to cash-rich closely held corporations.
We test whether dividend taxes affect corporate investments. We exploit Sweden’s 2006 dividend tax cut of 10 percentage points for closely held corporations and five percentage points for widely held corporations. Using rich administrative panel data and tripledifference estimators, we find that this dividend tax cut does not affect aggregate investment but that it affects the allocation of corporate investment. Cash-constrained firms increase investment after the dividend tax cut relative to cash-rich firms. Reallocation is stronger among closely held firms that experience a larger tax cut. This result is explained by higher external equity in cashconstrained firms and by higher dividends in cash-rich firms after the tax cut. The heterogeneous investment responses imply that the dividend tax cut raises efficiency by improving allocation of investment.
This paper empirically examines why tax avoidance differs across individuals. We use rich Swedish administrative panel data on all taxpayers, with a link between corporate and individual tax returns. Surprisingly, few individuals utilize legal and observable tax avoidance opportunities. Our results show that there are several frictions in tax avoidance participation. In addition to monetary benets from tax avoidance (incentives), the opportunity to participate in tax avoidance (access), as well as information and knowledge about these opportunities (awareness), are important factors for the individual's tax avoidance decision. We further show that information about tax avoidance opportunities spreads within informal networks.
This paper analyzes whether a dividend tax cut for owner–managers of closely held corporations encourages income shifting, income generation, or both. We use rich Swedish administrative micro data from 2000 to 2011 comprising detailed firm- and individual-level information. We find robust evidence of extensive income shifting across tax bases in response to the 2006 Swedish dividend tax cut. Owner–managers of closely held corporations reclassify earned income as dividend income but do not increase total income. The response is more pronounced for owner–managers with tax incentives and with easier access to income shifting through a high ownership share.
We examine the role of tax incentives, tax awareness, and complexity in tax evasion. We observe a specific type of tax evasion among business owners in Swedish administrative panel data, after the tax authority has approved all tax returns. For the period 2006–2009, approximately 5% of tax returns overstate a claimed dividend allowance. Tax awareness decreases and complexity increases the likelihood of misreporting. Our results indicate that some observed misreporting could be accidental, while some misreporting is deliberate tax evasion. We identify a positive and significant effect of tax rates on tax evasion, by exploiting a large kink in the tax schedule. The majority of misreporting cases remains undetected by the tax authority. Self-correction of tax evasion by taxpayers is the dominant type of detection.
This study examines the relation between executives’ inside debt holdings and corporate tax risk. As executives’ inside debt holdings are unsecured and unfunded, they should align executives’ interests with those of outside debtholders and incentivize executives to act more conservatively toward risk. Hence, inside debt should also reduce the risk of tax avoidance activities. Consistent with this prediction, we find that executive inside debt holdings are negatively related to tax risk. Further, this relation becomes stronger at higher levels of tax risk. We also find that the relation between insider debt and tax risk is stronger for firms that are not facing liquidity constraints and among well-governed firms. The latter result implies that institutional ownership and inside debt compensation are substitutes in reducing tax risk. Overall, our results suggest that part of the observed cross-sectional difference in tax avoidance can be explained by a reduction in tax risk that is related to executive inside debt holdings.
This paper examines the sensitivity of profit shifting to the corporate tax rate difference between a subsidiary and its parent company. We exploit tax rate variation stemming from European tax reforms over the period 2003-2013 while accounting for tax base adjustments that might affect firms’ profit shifting response to tax rate changes. We find that affiliates’ profits are sensitive to tax rate changes. However, tax base broadening reforms mitigate the tax rate incentives for profit shifting and significantly reduce the semi-elasticity of profits with respect to corporate tax rates. Finally, we provide evidence of a downward trend in the tax sensitivity of profit shifting, suggesting that the spread of anti-avoidance regulation may have successfully constrained profit-shifting strategies.