Optimal Income Taxation with a Risky Asset – The Triple Income Tax

We show in a two-period world with endogenous savings and two assets, one of them exhibiting a stochastic return, that an interest-adjusted income tax is optimal. This tax leaves a riskless component of interest income tax free and taxes the excess return with a special tax rate. There is no trade-off between risk allocation and efficiency in intertemporal consumption. Both goals are reached. As the resulting tax system divides income into three parts, the tax can also be called a Triple Income Tax. This distinction and a special tax rate on the excess return are necessary in order to have an optimal risk-shifting effect.optimal taxation, uncertainty, consumption tax, triple income tax

Optimal Income Taxation with a Risky Asset – The Triple Income Tax

We show in a two-period world with endogenous savings and two assets, one of them exhibiting a stochastic return that an interest adjusted income tax is optimal. This tax leaves a safe component of interest income tax free and taxes the excess return with a special tax rate. There is no trade off between risk allocation and efficiency in intertemporal consumption. Both goals are reached. As the resulting tax system divides income into three parts, the tax can also be called a triple income tax. This distinction and a special tax rate on the excess return is necessary in order to have an optimal risk shifting effect.Optimal Taxation, Uncertainty, Consumption Tax, Triple Income Tax

Debt Shifting and Ownership Structure

Previous theoretical studies on the debt shifting behavior of multinationals have assumed affiliates of multinationals to be wholly owned. We develop a model that allows a multinational firm to determine both the leverage and ownership structure in affiliates endogenously. A main finding is that affiliates with minority owners have less debt than wholly owned affiliates and therefore a less tax efficient financing structure. This is due to an externality that arises endogenously in our model, where costs and benefits of debt shifting are shared asymmetrically between minority and majority owners. Our findings provide a theory framework for recent empirical findings.Multinationals, tax-efficient financing structures, monority owner-ship

Multinationals, Minority Ownership and Tax-Efficient Financing Structures

We model how multinationals structure their borrowing and lending transactions and find that affiliates in high-tax countries have higher internal and overall debt ratios and lower rental rates of physical capital than comparable domestic firms. We also show that affiliates with minority owners have less debt than wholly owned affiliates.Multinational enterprises; tax-efficient financing structures; minority ownership

Catalyzers for Social Insurance: Education Subsidies vs. Real Capital Taxation

To analyze the optimal social insurance package, we set up a two-period life-cycle model with risky human capital investment, where the government has access to labor taxation, education subsidies and capital taxation. Social insurance is provided by redistributive labor taxation. Moreover, both education subsidies and capital taxation are used as catalyzers to facilitate social insurance by mitigating distortions from labor taxation. We derive a Ramsey-rule for the optimal combination of these two instruments. Relative to capital taxation, optimal education subsidies increase in their relative effectiveness to boost labor supply and in households' underinvestment into education, but they decrease in their relative net distortions. For their absolute levels, indirect complementarity effects, i.e., influencing the effectiveness of the other instrument, do matter. Generally, a decrease in capital taxes should go along with an increase in education subsidies.Human Capital Investment, Education Subsidies, Capital Taxation, Risk, Social Insurance

Company Tax Reform in Europe and its Effect on Collusive Behavior

We study how harmonization of corporate tax systems affects the stability of international cartels. We show that tax base harmonization reinforces collusive agreements, while harmonization of corporate tax rates may destabilize or stabilize cartels. We also find that bilateral and full harmonization to a common standard is worse from society’s point of view than unilateral harmonization to a minimum tax standard.corporate tax systems, tacit collusion

Profit-shifting in Two-sided Markets

We investigate how multinational two-sided platform firms set their prices on intra firm transactions. Two-sided platform firms derive income from two customer groups that are connected through at least one positive network externality from one group to the other. A main finding is that even in the absence of taxation transfer prices deviate from marginal cost of production. A second result of the paper is that it is inherently difficult to establish arm's length prices in two-sided markets. Finally, we find that differences in national tax rates may be welfare enhancing despite the use of such prices as a profit shifting device.Multinational enterprises; two-sided markets; profit shifting

Insuring Educational Risk: Opportunities versus Income

We develop a model of education where individuals face educational risk. Successfully entering the skilled labor sector depends on individual effort in education and public resources, but educational risk still causes (income) inequality. We show that an optimal public policy consists of deferred skill-specific tuition fees, lump-sum transfers/taxes, and public funding of the educational sector. We argue that improved educational opportunities matter more than direct income transfers in a Second-best setting. Contrary to standard models of income risk, it is not optimal to use a proportional wage tax, because combining skill-specific tuition fees and public education spending provide both insurance and redistribution at lower costs. A wage tax is only optimal if skill-specific tuition fees are not available.human capital investment, endogenous risk, learning effort, optimal taxation, public education

Multinationals, Minority Ownership and Tax-Efficient Financing Structures

This paper presents a theory model that simultaneously accounts for the financing decisions and ownership structure in affiliates of multinational firms. We find that affiliates of multinationals have higher internal and overall debt ratios and lower rental rates of physical capital than comparable domestic firms. We also show that affiliates with minority owners have less debt than wholly owned affiliates and a less tax-efficient financing structure. The latter is due to an externality whereby minority ownership dampens the incentive to avoid taxes through the use of internal debt.multinationals, tax-efficient financing structures, minority ownership

On the Desirability of Taxing Capital Income in Optimal Social Insurance

This paper analyzes optimal linear taxes on labor income and savings in a two-period life cycle model with ex ante identical households, endogenous leisure demands in both periods, and general processes of skill shocks over the life cycle. We demonstrate that the Atkinson-Stiglitz theorem breaks down under risk. Capital taxes are employed besides labor income taxes for two distinct reasons: i) capital taxes reduce labor supply distortions on second-period labor supply, since second-period labor supply and saving are substitutes, ii) capital taxes insure first-period income risk, although this benefit is partially off-set because first-period labor supply and saving are complements. Our results imply that (retirement) saving should not be actuarially fair.Optimal Capital Taxation, Risk, Atkinson-Stiglitz theorem