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This paper contrasts the individual capital gains realization behavior between progressive and proportional tax regimes. Using a longitudinal panel of over 288,000 individuals in Sweden, I exploit the 1991 tax reform in Sweden that changed progressive capital gains tax rates ranging from 12% to 80% to a proportional tax rate of 30%. Using the proportional tax system to control for non-tax reasons to realize capital gains, I show that individuals are highly responsive to capital gains tax incentives created by temporary income changes under a progressive capital gains tax. More specifically, I find that individuals with temporary negative (positive) income changes sell (hold) shares that they would hold (sell) in the absence of temporary tax incentives. Further, I show that high-income individuals are more tax sensitive than low-income individuals. This result indicates that low-income individuals facing temporary negative income changes could trade predominantly for non-tax reasons.
This study investigates why countries mandate accruals in the definition of corporate taxable income. Accruals alleviate timing and matching problems in cash flows, which smoothes taxable income and thus better aligns it with underlying economic performance. These accrual properties can be desirable in the tax setting as tax authorities seek more predictable corporate tax revenues. However, they can also make tax revenues procyclical by increasing the correlation between aggregate corporate tax revenues and aggregate economic activity. We argue that accruals shape the distribution of corporate tax revenues, which leads regulators to incorporate accruals into the definition of taxable income to balance the portfolio of government revenues and expenditures. Using a sample of 26 OECD countries, we find support for several theoretically motivated factors explaining the use of accruals in tax codes. We first provide evidence that corporate tax revenues are less volatile in high accrual countries, but high accrual countries collect relatively higher (lower) tax revenues when the corporate sector grows (contracts). Critically, we then show that accruals and smoother tax revenues are favored by countries with higher levels of government spending on public services and uncertain future expenditures, while countries with procyclical other tax collections favor cash rules and lower procyclicality of corporate tax revenues.
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.
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.
Tax loss carrybacks
(2016)
Tax regimes treat losses and profits asymmetrically when profits are immediately taxed but losses are not immediately refunded. We find that treating losses less asymmetrically by granting refunds less restrictively increases loss firms' investment: A third of the refund is invested and the rest is held as cash or returned to shareholders. However, the investment response is driven primarily by firms prone to engage in risky overinvestment. Consistent with the risk of misallocation, we find a delayed exit of low-productivity loss firms receiving less restrictive refunds, indicating potential distortion of the competitive selection of firms. This distortion also negatively affects aggregate output and productivity. Our results suggest that stimulating loss firms' investment with refunds unconditional on their future prospects comes at the risk of misallocation.
whether the moral evaluation of tax evasion is subject to a self-serving bias. We find that tax morale is egoistically biased: Subjects with the opportunity to evade taxes judge tax evasion as less unethical as opposed to those who cannot evade. The detection probability does not affect this result. Further, we do not find moral spillover effects, for example, on legal activities.
This paper studies the cross-base tax elasticity of capital gains realizations to labor income taxes when capital gains are taxed at a separate proportional tax rate. Using a longitudinal panel of over 265,000 individuals in Sweden, this paper shows in a regression kink design that labor income taxes affect capital gains at the extensive and intensive margins. An increase in the marginal labor income tax rate increases the likelihood of realizing capital gains and the amount of realized capital gains. One implication of this result is that the excess burden of labor income taxation is affected by cross-base tax elasticities.
This paper studies the effect of corporate taxes on investment. Since firms with a foreign parent have more cross-country profit shifting opportunities than domestically owned firms do, their effective tax rate and, consequently, their tax-induced costs to investment are lower. We therefore expect capital investment responses to a corporate tax cut to be heterogeneous across firms. Using firm-level data on German corporations, we exploit the 2008 tax reform, which substantially cut corporate taxes as an exogenous policy shock and expect domestically owned firms' investments to be more responsive to the reform. We show exactly this in a difference-in-differences setting. We find that the reduction in corporate tax payments led to a one-to-one increase in the real investments of domestic firms. The effect is stronger for domestic firms relying more on internal funds. Correspondingly, labor investment increased more for domestic firms, ensuring a constant mix of input factors. In addition, we show that domestic firms' sales grew faster after the tax cut than the sales of foreign-owned firms. Our results imply that corporate tax changes can increase corporate investment but that domestic firms benefit more than foreign-owned firms from a tax cut through higher investment responses resulting in greater sales growth.
The paper studies the effect of uncertainty in firm-speciffic tax avoidance on firm value. We first show in a clean surplus valuation model that expectations about future profitability interact with corporate tax avoidance. Two dimensions of corporate tax avoidance strategies matter for valuation: uncertainty and level of expected future tax rates. We confirm the importance of level and uncertainty of tax avoidance for forecasts of future tax rates using a small sample of analyst tax rate forecasts. Consistent with the model and the implications from analyst forecasts, we derive a tax signal-to-noise ratio based on historical tax information. In our sample of 2,820 firms, we show empirically that this tax signal-to-noise ratio amplifies the effect of pre-tax earnings on firm value. Pre-tax earnings have a stronger effect on firm value for firms with effective and persistent tax avoidance. Firms with volatile effective tax rates receive a discount on their earnings.
This paper analyzes heterogeneity in capital gains tax elasticities across individuals. Using panel data of over 260,000 individuals, I find that the sensitivity of capital gains to taxes is decreasing over the individual life cycle. Younger individuals respond more strongly to changes in capital gains taxes than older individuals. An increase in age of 18 years decreases the lock-in effect of capital gains taxes by approximately 10%.