Public Finance and Low Equilibria in Transition Economies; The Role of Institutions

This paper develops two stylised models of the transitional economy that challenge to some extent, the conventional approach to policy-reforms. In the first model, the absence of market-oriented institutions is responsible for the occurrence of a non-cooperative equilibrium, where the amount of public services provided by the state is too low, which, in turn, adversely affects the global performance of the productive sector. In the second model, the government, which aims to maximise tax receipts, will choose a taxation level that pushes too many firms out of the market; hence the global supply falls below its optimal level. In both models, strain and disruptions specific to transitional systems lead to abnormal responses of the real sector to standard policy measures. Efficient economic policies should explicitly take into account the institutional deficit.http://deepblue.lib.umich.edu/bitstream/2027.42/39703/3/wp319.pd

Taxes and Portfolio Choice: Evidence from JGTRRA's Treatment of International Dividends

This paper investigates how taxes influence portfolio choices by exploring the response to the distinctive treatment of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). JGTRRA lowered the dividend tax rate to 15% for American equities and extended this tax relief only to foreign corporations from a subset of countries. This paper uses a difference-in-difference analysis that compares US equity holdings in affected and unaffected countries. The international investment responses to JGTRRA were substantial and imply an elasticity of asset holdings with respect to taxes of -1.6. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment or changed tax evasion behavior.

Can Capital Income Taxes Survive? And Should They?

The paper surveys some main results in the theory of capital income taxation in the open economy; reviews recent trends in international taxation, and discusses alternative blueprints for fundamental capital income tax reform from the perspective of an open economy faced with growing mobility of capital income tax bases.

Newsletter / House of Finance, Goethe-Universität Frankfurt 4/09

Editorial: Jens Weidmann : "Central Banks and Monetary Policy after the Crisis" Research Finance: Holger Kraft,Claus Munk : "Optimal Housing, Consumption, and Investment Decisions over the Life Cycle" Research Money/Macro: Ester Faia, Eleni Iliopulos : "Financial Globalization and Monetary Policy" Research Law: Andreas Cahn, D. Schöneberger : "Shareholder Governance in Europe" Policy Platform: Michael Haliassos, Dimitri Vayanos : "Getting Greece Back on Track: How?" Interview: Raimond Maurer, Ralph Rogalla : "Longevity Risk and Capital Markets Solutions

Entrepreneurship and the Theory of Taxation

Taxation theory rarely takes entrepreneurship into consideration. We discuss how this omission affects conclusions derived from standard models of capital taxation when applied to entrepreneurial income. Some of the defining features of entrepreneurship often omitted by standard capital taxation theory are incorporated into the analysis. This includes the lack of a well-functioning external market for entrepreneurial effort, limited access to external capital and the complementarities between entrepreneurial effort, entrepre-neurial innovation and capital investment. Because of these constraints, the entrepreneurial project is tied to the individual owner-manager. Unlike the typical passive portfolio investor assumed in cost of capital models the entrepreneur is unable to decouple savings decisions from investment decisions, and due to the comple-mentarities in production makes a joint decision on the supply of effort and capital. The returns from success-ful entrepreneurial ventures thus cannot be readily divided into labor and capital income, in stark contrast to what is assumed in standard taxation theory. When unique attributes of entrepreneurship are taken into account, some major conclusions of capital taxation models no longer hold, including the neutrality of capital taxation in owner-managed firms. These results are particularly important for the Nordic system of dual taxation, the theoretical foundation of which relies on the ability to neatly separate capital income from the labor income of the self-employed.Capital Income Taxation; Dual Income Taxation; Entrepreneurship; Innovation; Institutions; Labor Supply; New Firm Creation; Optimal Factor Taxes; Taxation; Tax Policy

The pricing of country funds and their role in capital mobilization for emerging economies

The authors theoretically analyze country funds, focusing on emerging economies in which capital markets are not readily accessible to outside investors. They study country-fund pricing and the associated policy implications under alternative variations on segmentation of international markets. They show that country funds traded in the developed capital markets can help promote the efficiency of pricing in the emerging capital markets and can enhance capital mobilization by local firms. These efficiency gains vary depending on the degree of the international investor's access to the emerging market securities (access effect), on the degree to which the industrialized countries'securities market span the securities offered in the emerging markets (substitution effect), and on the existing cross-border arbitrage restrictions. As a byproduct of their analysis, the authors study the reasons why country funds sell at a premium or discount relative to their net underlying asset value. They also show that the efficiency gains that arise with the development of new funds can be positive even when these funds start trading at a discount. They conclude with a catalog of policy implications, including strategies for efficiently promoting country funds. For example : in general, introducing the country fund in the advanced or developed market increases the prices of the underlying component assets traded in the originating emerging markets; as a policy matter, country funds that should be encouraged by emerging countries for introduction by fund promoters should be targeted to those local assets with imperfect or no substitutes in the advanced core markets; and in some circumstances, it may be socially optimal to subsidize the introduction of new funds that are expected to sell at a discount.International Terrorism&Counterterrorism,Economic Theory&Research,Access to Markets,Markets and Market Access,Banks&Banking Reform

Whither Capitalism? Financial externalities and crisis

As with global warming, so with financial crises – externalities have a lot to answer for. We look at three of them. First the financial accelerator due to ‘fire sales’ of collateral assets -- a form of pecuniary externality that leads to liquidity being undervalued. Second the ‘risk- shifting’ behaviour of highly-levered financial institutions who keep the upside of risky investment while passing the downside to others thanks to limited liability. Finally, the network externality where the structure of the financial industry helps propagate shocks around the system unless this is checked by some form of circuit breaker, or ‘ring-fence’. The contrast between crisis-induced Great Recession and its aftermath of slow growth in the West and the rapid - and (so far) sustained - growth in the East suggests that successful economic progress may depend on how well these externalities are managed

The evolution of aggregate stock ownership : [Version December 2010]

Since World War II, direct stock ownership by households has largely been replaced by indirect stock ownership by financial institutions. We argue that tax policy is the driving force. Using long time-series from eight countries, we show that the fraction of household ownership decreases with measures of the tax benefits of holding stocks inside a pension plan. This finding is important for policy considerations on effective taxation and for financial economics research on the long-term effects of taxation on corporate finance and asset prices. JEL Classification: G10, G20, H22, H30 Keywords: Capital Gains Tax, Income Tax, Stock Ownership, Bond Ownership, Inflation, Bracket Creep, Pension Fund

Can Capital Income Taxes Survive? And Should They?

The paper surveys some main results in the theory of capital income taxation in the open economy; reviews recent trends in international taxation, and discusses alternative blueprints for fundamental capital income tax reform from the perspective of an open economy faced with growing mobility of capital income tax bases.