Sales and Price Effects of Pre-announced Consumption Tax reforms: Micro-level Evidence from Europoean VAT

This paper studies the effects of consumption tax reforms on prices and the time path of consumption spending in EU countries utilizing micro-level data on the monthly unit sales and prices of consumer durables. The identification strategy exploits the trading of identical products in multiple countries. The results show that tax-rate changes are fully and quickly shifted into prices and strongly affect the time path of consumption. The empirical findings for consumption spending indicate that tax rate changes exert temporary effects shortly before implementation, which are more than reverted after implementation. Quantitatively, we find that sales increase by about 2.5% in the last month before and drop by almost 5% after implementation if the tax rate increases by one percentage point

Leveling the International Playing Field with the Marketplace Fairness Act

Quill v. North Dakota unbalanced the American retail market with its preference for out-of-state over in-state sellers. The preference under Quill is that sellers without physical presence in a state cannot be compelled to collect the sales tax. If the buyer does not voluntarily remit the complementary use tax, the purchase is effectively tax-free. As a result, Quill is seen as facilitating tax avoidance and driving business to sellers who have no in-state nexus, notably e-businesses. Revenue losses are estimated in excess of $10 billion per year. The reach of the Quill decision is international. Preferred sellers can reside just as easily in another country as they can in another State. The international dimension of the Quill decision means that legislative efforts to correct Quill’s preference for out-of-state sellers, like the Marketplace Fairness Act (MFA), also have international implications. This paper provides a rough analytical and quantitative measure of the impact of the MFA on the largest block of foreign businesses selling into the US, businesses selling from the EU.* Analytically, the MFA offers a compliance regime similar to that advanced by the EU Commission for collecting VAT on difficult cross-border transactions. This administrative replication allows outcomes to be compared. Quantitative measures can be extrapolated from trade statistics, and will allow some rough estimate of where the MFA will have its greatest international impact. The EU and the US Sates are looking at much the same problem when they endeavor to have remote sellers collect and remit destination-based consumption taxes. Both systems recognize that simply having a law in place requiring collection is not sufficient. Both systems have adopted one-stop-shops (OSS) and compliance simplifications to induce or persuade remote sellers to comply. The EU’s preference for a government-centric OSS and the US preference for OSSs that involve third-parties and certified software may have very different success profiles. This is an important assessment that is yet to come, but it suggests that the US may want to borrow a solution from the EU, or the EU may want to borrow a solution from the US States. Both sides need to be open to the possibility. * The transatlantic economy is the largest and wealthiest market in the world, accounting for over 54% of world GDP in terms of value and 40% in terms of purchasing power. See: Daniel S. Hamilton & Joseph P. Quinlan, The Transatlantic Economy 2011 – Annual Survey of Jobs, Trade and Investment between the United States and Europe, Center for Transatlantic Relations, Johns Hopkins University, Paul H. Nitz School of Advanced International Studies

INTERTEMPORAL INCOME SHIFTING IN EXPECTATION OF LOWER CORPORATE TAX RATES: THE TAX REFORMS IN CENTRAL AND EASTERN EUROPE CERGE-EI Intertemporal Income Shifting in Expectation of Lower Corporate Tax Rates: The Tax Reforms in Central and Eastern Europe Inte

Most of this increase, however, was due to short-term shifting of income to years with lower tax rates leading to non-transitory responses ranging from zero to .151, depending on the specification employed. Splitting the sample by firm size shows that income shifting is an appealing tax saving strategy for small and to a lesser extent medium-sized enterprises, but not for big firms. A further disaggregation by country reveals that the driving country behind the results is Romania. Keywords: Corporate tax, Income Shifting, Tax reforms, Central and Eastern Europe JEL Classification: H25; H32; D32 * I wish to thank Libor Dušek, Jan Kmenta, Jan Hanousek, and Štěpán Jurajda for useful comments. Any remaining errors are mine. † CERGE-EI is a joint workplace of the Center for Economic Research and Graduate Education, Charles University, and the Economics Institute of the Academy of Sciences of the Czech Republic. Politickych veznu 7, 111 21 Prague 1, Czech Republic, e-mail: [email protected]

Corporate Taxation, Tax Evasion, and Tax Design

In a letter to Jean-Baptiste Leroy in 1789, Benjamin Franklin observed that "...in this world nothing can be said to be certain, except death and taxes!" Individuals and businesses, however, certainly employ skilful ways to evade taxes until they are caught, if they ever are. Inevitably, the evolution of taxation systems and their accompanying legal frameworks result in adjustments to evasion/avoidance patterns and mechanisms, which are of interest to economists, social psychologists, and public administrations alike. The objective of this thesis is to study the effects of the widespread shift towards indirect taxation in the European Union (EU) on firms' tax compliance behaviour. This shift is generally characterised by rising consumption taxes, in particular the value-added tax (VAT) and falling corporate tax rates (CIT). While the policy of radical lowering of the corporate tax burden will likely lead to more honest profit disclosure, my research suggests that firms' evasion practices can migrate to other tax bases, such as social security, where plentiful savings from evasion schemes can be realised. When payroll taxes are significantly above the CIT rates, incentives emerge for companies to under-report wages, since under-stating labour costs is cheaper than paying full contributions. Chapter..

Intertemporal income shifting in expectation of lower corporate tax rates: the tax reforms in Central and Eastern Europe

This paper examines if firms shift income out of years with high corporate tax rates into years when tax cuts are anticipated. Such intertemporal shifting can be one explanation for the stability of corporate tax revenues in Central and Eastern Europe, despite the major decline in the corporate tax rates and overall narrowing of the tax base starting in the late 90s. Using firm-level panel data for Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia from 1999 to 2005, the estimates indicate that the lower corporate tax rates induced a considerable increase in taxable income

The effect of low corporate tax rate on payroll tax evasion

It is a commonly held view that the widespread policy of cutting the corporate income tax has a positive effect on taxable income through decreasing firms' incentive to hide profits. A neglected side of this policy, however, is its potential to trigger more evasion in other tax bases, such as the social security base, especially if the corporate income tax rate is low compared to the payroll rate. We develop a model in which employers and employees cooperate in declaring lower wages to the tax authorities in order to evade payroll contributions

The Effect of Low Corporate Tax Rate on Payroll Tax Evasion

It is a commonly held view that the widespread policy of cutting the corporate income tax has a positive effect on taxable income through decreasing firms' incentive to hide profits. A neglected side of this policy, however, is its potential to trigger more evasion in other tax bases, such as the social security base, especially if the corporate income tax rate is low compared to the payroll rate. We develop a model in which employers and employees cooperate in declaring lower wages to the tax authorities in order to evade payroll contributions. Since wages and payroll taxes are a deductible expense for firms, a lower reported wage translates into higher corporate profits on paper and hence, shifting of tax liability out of social security into the corporate tax base. Using firm-level panel data for Bulgaria, where the problem of contribution evasion is prevalent, we find that a 1% increase in the net-of-tax-share of the corporate tax rate reduces reported wages in the economy by .21%, but leads to higher taxable incomes. An identical increase in the payroll net-of-tax-share results in a .28% rise in wages. Thus, even though the separate tax bases respond significantly to changes in the corporate tax rate, the impact on the combined tax base of wages and taxable incomes is estimated to be small.corporate tax; payroll tax; evasion; wage underreporting;

Real-Time Collection of the Value-Added Tax: Some Business and Legal Implications

Recent estimates of the level of VAT fraud in the EU are commensurate with the EU budget. With the Green paper on the future of VAT, the European Commission stressed the urgency and necessity of comprehensive VAT reforms. This paper analyses the business and legal implications of the recently proposed split-payment mechanism, which, if implemented, would move VAT’s method of collection to real-time. The discussion is positioned in the context of two increasingly visible trends in the EU – the general shift towards greater reliance on indirect taxation and the growing popularity of electronic payment instruments. The potential implementation of VAT withholding would be a radical reform, given its shift of the taxation system from voluntary to forced compliance. We argue that, on the one hand, real-time VAT collection would constitute a potent preventive measure against VAT fraud, which could generate synergetic effects within SEPA, and further deepen integration through the harmonisation of VAT policies. On the other hand, real-time audit/refund would require tax authorities’ access to confidential business information that may be incompatible with EU privacy rules. The trade-off between efficient tax collection and privacy concerns mirrors the general debate on data protection in a cashless economy