Lessons in Harmony: What Experience in the Atlantic Provinces Shows About the Benefits of a Harmonized Sales Tax

Provincial retail sales taxes are remarkably high on business inputs, including purchases of capital goods that spur growth in productivity and employment. Evidence from Eastern provinces with a Harmonized Sales Tax (HST) suggests that harmonizing provincial sales taxes with the federal GST would eliminate most of this distortion, without leading to an increase in consumer prices.tax reform, retail sales taxes

Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada

We study corporate income tax competition when firms operating in multiple jurisdictions can shift income using financial planning strategies. Several such strategies, particularly intra-corporate lending, appear to be actively pursued by companies to reduce subnational corporate taxes in Canada. A simple theoretical model shows how interjurisdictional tax planning can give rise to asymmetries in jurisdictions’ tax policies, with one jurisdiction becoming a “tax haven” to attract taxable income through financial transactions, while others set higher statutory rates. Further, increased competition from tax havens may paradoxically lead to tax increases by high-tax jurisdictions. Analysis of data from administrative tax records suggests income shifting has pronounced effects on provincial tax bases in Canada. According to our preferred estimate, the elasticity of taxable income with respect to tax rates for "tax shifting" firms is 4.3, compared to 1.6 for other, comparable firms.

Corporate Lobbying and Commitment Failure in Capital Taxation

This paper investigates the effects of lobbying by corporations when investments are irreversible and government cannot commit to tax policies. We show that industries which rely more heavily on sunk capital lobby more vigorously and are generally more successful in obtaining tax breaks. Thus lobbying can mitigate the capital levy problem. Nevertheless, these industries invest less in long-run equilibrium than more flexible ones. We then consider the effects of relaxing legal restrictions on corporate lobbying. When the deadweight costs of lobbying fall, taxes on sunk capital tend to fall, but political contributions may rise, as lobbyists compete more intensively for political favors. On balance, a ban of lobbying may therefore cause investment to rise or fall.

Regional Grants as Pork Barrel Politics

We investigate the political and economic factors influencing the allocation of regional development grants for a panel of Canadian electoral districts in the 1988-2001 period. In a strong party system such as Canada’s, models of political competition predict little role for individual legislators, as party leaders allocate resources to maximize party success. While spending is targeted toward some “swing” districts, we do also find it is higher in districts represented by members of the government party, especially those in the federal Cabinet, and those of lower seniority. We develop a model featuring bargaining over legislative and non-legislative favours that is consistent with the evidence.

Is Targeted Tax Competition Less Harmful than its Remedies?

Some governments have recently called for international accords restricting the use of preferential taxes targeted to attract mobile tax bases from abroad. Are such agreements likely to discourage tax competition or conversely cause it to spread? We study a general model of competition for multiple tax bases and establish conditions for a restriction on preferential regimes to increase or decrease tax revenues. Our results show that restrictions are most likely to be desirable when tax bases are on average highly responsive to a coordinated increase in tax rates by all governments, and when tax bases with large domestic elasticities are also more mobile internationally. Our analysis allows us to reconcile the apparently contradictory results, derived from analyzing special cases, of the previous literature.preferential taxation, tax competition, multiple tax bases

The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions

This paper shows how a popular system of federal revenue equalization grants can limit tax competition among subnational governments, correct fiscal externalities, and increase government spending. Remarkably, an equalization grant can implement efficient policy choices by regional governments, regardless of a wide variety of differences in regional tax capacity, tastes for public spending, and population. Thus, compared to other corrective devices, equalization achieves “robust” implementation. If aggregate tax bases are elastic, however, equalization leads to excessive taxation. Efficiency can be achieved by a modified formula that equalizes a fraction of local revenue deficiencies equal to the fraction of taxes that are shifted backward to factor suppliers.tax competition, intergovernmental grants

In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment

The multinationalization of corporate investment in recent years has given rise to a number of international tax avoidance schemes that may be eroding tax revenues in industrialized countries, but which may also reduce tax burdens on mobile capital and so facilitate investment. Both the welfare effects of and the optimal response to international tax planning are therefore ambiguous. Evaluating these factors in a simple general equilibrium model, we find that citizens of high-tax countries benefit from (some) tax planning. Paradoxically, if tax rates are not too high, an increase in tax planning activity causes a rise in optimal corporate tax rates, and a decline in multinational investment. Thus fears of a “race to the bottom” in corporate tax rates may be misplaced.income shifting, tax planning, foreign direct investment, tax competition, thin capitalization

Incentives for public investment under fiscal rules

The authors explore the relationship between fiscal rules and capital budgeting. The current budgetary approach to limit deficits to a fixed portion of GDP or to balance budgets could undermine incentives to invest in public capital with long-run returns since politicians concerned about electoral prospects would favor expenditures providing immediate benefits to their voters. An alternative budgetary approach is to separate capital from current revenues and expenditures and relax fiscal constraints by allowing governments to finance capital expenditures with debt, as suggested by the golden rule approach to capital funding. But the effect of capital budgeting would be to provide opportunities to politicians to escape the fiscal rule constraints by shifting current expenditures into capital accounts that are difficult to measure properly, thereby leading to increased borrowing. As an alternative, the authors propose a modified golden rule limiting debt finance to a proportion of the government's investment in self-liquidating assets.Public Sector Economics&Finance,Investment and Investment Climate,Economic Theory&Research,Public&Municipal Finance,Urban Economics

A Longitudinal Analysis of Cars, Transit, and Employment Outcomes

Access to cars and transit can influence individuals’ ability to reach opportunities such as jobs, health care, and other important activities. While access to cars and public transit varies considerably across time, space, and across populations, most research portrays car access as a snapshot in time; some people have a car and others do not. But does this snapshot approach mask variation in car ownership over time? And how does access to particular types of transportation resources influence individuals’ economic outcomes? The authors improve upon existing research by using panel data from 1999 to 2013 from the Panel Study of Income Dynamics (PSID) to examine levels of automobile access in groups that have variable access: poor families, immigrants, and people of color. They further employ two new national datasets of access to jobs using public transit. These datasets are used to examine the effect of transit and automobile access on income growth over time within families, controlling for a number of relevant variables. The research found that for most families, being “carless” is a temporary condition. While 13% of families in the US are carless in any given year, only 5% of families are carless for all seven waves of data examined in the analysis. The research also found that poor families, immigrants, and people of color (particularly blacks) are considerably more likely to transition into and out car owner-ship frequently and are less likely to have a car in any survey year than are non-poor families, the US-born, and whites. The research also found that improving automobile access is associated with a decreased probability of future unemployment and is associated with greater income gains. However, the analysis suggests that the costs of owning and maintaining a car may be greater than the income gains associated with in-creased car ownership. The relationship between public transit and improved economic outcomes is less clear. The research found that living in areas with access to high-quality public transportation has no relationship with future earnings. However, transit serves an important purpose in providing mobility for those who cannot or choose not to own a car

Term Limits and Electoral Accountability

Periodic elections are the main instrument through which voters can hold politicians accountable. From this perspective term limits, which restrict voters' ability to reward politicians with re-election, appear counterproductive. We show that despite the disciplining effect of elections, term limits can be ex ante welfare improving from the perspective of voters. By reducing the value of holding office term limits can induce politicians to implement policies that are closer to their private preferences. Such "truthful" behavior by incumbents in turn results in better screening of incumbents. We show that the combination of these two effects can strictly increase the utility of voters.Political Agency, Accountability, Term Limits