A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation

This paper develops a simple theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that capital controls are not guided by the absolute desire to alter the intertemporal price of the goods produced in any given period, but rather by the relative strength of this desire between two consecutive periods. Specifically, it is optimal for the strategic country to tax capital inflows (or subsidize capital outflows) if it grows faster than the rest of the world and to tax capital outflows (or subsidize capital inflows) if it grows more slowly. In the long-run, if relative endowments converge to a steady state, taxes on international capital flows converge to zero. Although our theory emphasizes interest rate manipulation, the country's net financial position per se is irrelevant.

Resource Abundance, Political Corruption, and Instability of Democracy

In this paper we analyze data on sustainability of democratic regimes in resource rich countries and suggest a model to explain why resource abundance may lead to instability of democracy in some countries, but does not create any difficulties for a democratic system in other ones. Rate of resource rent tax is considered as the only policy instrument in our simple model. The tax affects the income of a representative voter. Choosing a tax rate, Autocrat competes with conventional Politician (a representative political party) for the office. Our model demonstrates the existence of a threshold for propensity to corruption (a measure of the institutional quality). The probability of the democracy preservation is decreasing in the amount of resources if the propensity is high and is independent of resources or even grows with the amount of resources if the propensity is low. It is shown also that Autocrat may use two types of policies depending on the qualities of governance (abilities to allocate tax revenues without big losses) that the public assigns to her and to Politician. More efficient Autocrat is inclined to follow populist high tax policy whereas lower Autocrat’s efficiency results in pro-Oligarch low tax policy when the country is resource abundant.Democracy; resource abundance; corruption

Ottawa's Pension Gap: The Growing and Under-reported Cost of Federal Employee Pensions

Canadian public-sector pension plans typically do not use market yields to calculate their liabilities: if they did, Ottawa’s unfunded pension liability would stand at $227 billion – some$80 billion larger than reported in the Public Accounts. The value of the typical federal employee’s pension entitlement grows at more than 40 percent of pay annually – much faster than the contributions to fund it – putting taxpayers, most of whom face federal tax rules preventing them from funding as rich a retirement for themselves, at risk of having to bail out Ottawa’s pension plans.Pension Papers, Canadian public-sector pension plans, unfunded pension liability, Public Accounts

Streamlined Sales and Use Tax Agreement: Is Your Business Ready for Compliance?

As electronic commerce grows, states continue to lose tax revenue from vendors who fail to collect taxes on goods sold over the Internet. The problem has become so severe that 44 states and the District of Columbia are working on legislation, known as the Streamlined Sales and Use Tax Agreement, to simplify collection of taxes from Internet vendors. The Agreement simplifies rates and requires businesses to collect taxes when selling goods in remote locations. Businesses need to pay particular attention to this new Agreement for two reasons. First, it is likely to become law in nearly every state, and second, it requires businesses to pay back taxes on goods sold over the Internet if they fail to meet the requirements of its amnesty provision

Small Business Taxation: Revamping Incentives to Encourage Growth

This study adopts a new approach in assessing the impact of taxes on small business growth and suggests the need to consider new incentives that would be more effective in encouraging small business growth and would also improve the neutrality of the existing tax system. In recent years, federal and provincial governments have provided various corporate tax incentives to small businesses with the aim of helping them grow. While it is commonly believed that small businesses are responsible for most job creation, unfortunately the only study available has shown that while many small businesses are created, few grow. Yet many governments believe that the incentives are important even though little evidence supports the effectiveness of small business corporate concessions. Some provinces have actually eliminated corporate taxes on small businesses or reduced such taxes to a symbolic level (e.g., one to two percent) without there being any empirical support in favour of the effectiveness of such actions.In contradiction to the widely held view that small business tax concessions encourage growth, such small business tax relief could actually be antithetical to growth by creating a “taxation wall.” First, it could result in the breakup of companies into smaller, less efficient-sized units in order to take advantage of tax benefits even if there are economic gains to growing in size. Second, it could encourage individuals to create small corporations in order to reduce their personal tax liabilities rather than grow companies. And third, it could lead to a “threshold effect” that holds back small business from growing beyond the official definition of “smallness,” regardless of the criteria for measuring size (e.g., the size of revenue or assets, or the number of employees). In this paper, we evaluate the impact of both corporate and personal taxes on the growth of small business and we focus in particular on the likely consequences of the aforementioned threshold effect. We use a new approach in assessing the impact of taxes on small business growth by estimating the amount of tax paid on the rate of return to capital as a small business grows in size. We show that small business growth is hampered by the existing tax system. As a business grows, effective tax rates on capital investments made by entrepreneurs virtually double when the business grows from as a little as $1 million to over$30 million in asset size. The issue is particularly important to the provinces that have been creating greater gaps between large and small business tax rates.The aim of tax incentives should be to try to avoid creating a wall that inhibits growth in small businesses, but instead flattens corporate and personal taxes with respect to incentives structured to induce growth. We provide some specific recommendations for growth-enhancing incentives that are superior to the small business tax deduction and other incentives of a similar type. Incentives associated with size should be avoided as much as possible, a proposal that is consistent with International Monetary Fund (IMF) recommendations

Challenges of Value Added Tax on International E-Commerce in Electronic Goods and Services in Kenya

The current study was on the effectiveness challenges of value added tax on international e-commerce in electronic goods and services in Kenya. The study adopted a descriptive research design. The target population was 199 KRA VAT officers. The sample size was 50 officers. Primary data were used in this study. For primary data, the data collection instrument used in this study was questionnaires. These questionnaires were used to collect data from the taxation authority officials dealing with VAT. The questionnaires were administered via e-mail surveys and personal visits to respondents, that is the KRA VAT officers. The research findings revealed that the major challenges against an effective VAT system for international e-commerce in electronic goods and services in Kenya included the lack of attention to e-commerce as a unique industry in the VAT Act and the lack of unique policies to regulate the sector. From questions posed to the KRA VAT officers, it emerged that there was a lack of proper and adequate resources, and their usage, within the taxation authority to monitor the industry. The website owners commonly complained of the lack of proper infrastructure that hindered the growth of the industry, for example, the lack of a proper banking and financial infrastructure. it is recommended that the taxation authority (KRA) should make its internal administration processes and policies more efficient and grow with the technology as it grows, for example, through providing e-services to taxpayers to start with. The industry must be regulated through proper policies and legislation before KRA can contemplate properly obtaining the rightful tax from it. There is need to address e-commerce as a unique medium of transactions, demanding its own tax legislation. KRA should solicit the cooperation of stakeholders to regulate the industry, for example, Internet Service Providers could bill their clients on behalf of KRA through a withholding tax. Similarly, banking institutions could withhold value added tax, if need be, on financial transfers for electronic transactions carried out online. There is scarcity of information about the effectiveness challenges of Value Added Tax on International E-Commerce in Electronic Goods and Services in Kenya and in developing economies in general and this paper expands the existing knowledge base. Therefore, the unique contribution of the study has been to bring to light what is unknown about the effectiveness challenges of Value Added Tax on International E-Commerce in Electronic Goods and Services in Kenya. Keywords: Effectiveness Value Added Tax, International Ecommerce, Electronic Goods and Service

A bridge to a low carbon future? Modelling the long-term global potential of natural gas

This project uses the global TIMES Integrated Assessment Model in UCL (‘TIAM-UCL’) to provide robust quantitative insights into the future of natural gas in the energy system and in particular whether or not gas has the potential to act as a ‘bridge’ to a low-carbon future on both a global and regional basis out to 2050. This report first explores the dynamics of a scenario that disregards any need to cut greenhouse gas (GHG) emissions. Such a scenario results in a large uptake in the production and consumption of all fossil fuels, with coal in particular dominating the electricity system. It is unconventional sources of gas production that account for much of the rise in natural gas production; with shale gas exceeding 1 Tcm after 2040. Gas consumption grows in all sectors apart from the electricity sector, and eventually becomes cost effective both as a marine fuel (as liquefied natural gas) and in medium goods vehicles (as compressed natural gas). It next examines how different gas market structures affect natural gas production, consumption, and trade patterns. For the two different scenarios constructed, one continued current regionalised gas markets, which are characterised by very different prices in different regions with these prices often based on oil indexation, while the other allowed a global gas price to form based on gas supply-demand fundamentals. It finds only a small change in overall global gas production levels between these but a major difference in levels of gas trade and so conclude that if gas exporters choose to defend oil indexation in the short-term, they may end up destroying their export markets in longer term. A move towards pricing gas internationally, based on supply-demand dynamics, is thus shown to be crucial if the if they are to maintain their current levels of exports. Nevertheless, it is also shown that, regardless of how gas is priced in the future, scenarios leading to a 2oC temperature rise generally have larger pipeline and LNG exports than scenarios that lead to a higher temperature increase. For pipeline trade, the adoption of any ambitious emissions reduction agreement results in little loss of markets and could (if carbon capture and storage is available) actually lead to a much greater level of exports. For LNG trade, because of the significant role that gas can play in replacing future coal demand in the emerging economies in Asia, markets that are largely supplied by LNG at present, we demonstrate that export countries should actively pursue an ambitious global agreement on GHG emissions mitigation if they want to expand their exports. These results thus have important implications for the negotiating positions of gas-exporting countries in the ongoing discussions on agreeing an ambitious global agreement on emissions reduction

The Effects of Budget 2011 on Activity in the UK Continental Shelf

Publisher PD

Dynamics of Wealth Inequality

We study an agent-based model of evolution of wealth distribution in a macro-economic system. The evolution is driven by multiplicative stochastic fluctuations governed by the law of proportionate growth and interactions between agents. We are mainly interested in interactions increasing wealth inequality that is in a local implementation of the accumulated advantage principle. Such interactions destabilise the system. They are confronted in the model with a global regulatory mechanism which reduces wealth inequality. There are different scenarios emerging as a net effect of these two competing mechanisms. When the effect of the global regulation (economic interventionism) is too weak the system is unstable and it never reaches equilibrium. When the effect is sufficiently strong the system evolves towards a limiting stationary distribution with a Pareto tail. In between there is a critical phase. In this phase the system may evolve towards a steady state with a multimodal wealth distribution. The corresponding cumulative density function has a characteristic stairway pattern which reflects the effect of economic stratification. The stairs represent wealth levels of economic classes separated by wealth gaps. As we show, the pattern is typical for macro-economic systems with a limited economic freedom. One can find such a multimodal pattern in empirical data, for instance, in the highest percentile of wealth distribution for the population in urban areas of China.Comment: 17 pages, 8 figures (references added, some material moved to appendix