Tax Policy and the Economy

October 3, 2013
Jeffrey Brown of University of Illinois at Urbana-Champaign, Organizer

Douglas Shackelford, University of North Carolina, Chapel Hill and NBER, and Kevin Markle, Dartmouth College

The Impact of Headquarter and Subsidiary Locations on Multinationals' Effective Tax Rates

Markle and Shackelford examine effective tax rates (ETRs) for 9,022 multinationals from 87 countries from 2006 to 2011. They find that, despite extensive investments in international tax avoidance, multinationals headquartered in Japan, the United States, and some high-tax European countries continue to face substantially higher worldwide taxes than their counterparts in havens and other less heavily taxed locations. Other findings include: 1, effective tax rates remained steady over the investigation period; 2, entering a tax haven country for the first time results in a slight reduction in the firm's ETR; and 3, ETR changes vary depending on whether the subsidiary is a financial conduit or an operating subsidiary. These results should inform ongoing international tax policy debates and expand scholars' understanding of the taxation of multinationals.

Annette Alstadsaetter, University of Oslo; Wojciech Kopczuk, Columbia University and NBER; and Kjetil Telle, Statistics Norway

Are Closely-Held Firms Tax Shelters?

In 2004 Norwegian authorities introduced dividend taxation for personal (but not corporate) owners which would take effect in 2006. This change provided incentives to maximize dividends in 2004 and 2005, and to retain earnings in the following years. Using Norwegian registry data that covers the universe of non-publicly traded firms, Alstadsaetter, Kopczuk, and Telle find that dividend payments responded very strongly to the anticipated reform, but also that much of the response was compensated by injecting shareholder equity. On the other hand, following the reform firms began to retain earnings. While all categories of assets grew, the increase in durable assets categories that include equipment, machinery and company cars is particularly striking. The authors find that personally-owned firms and those that pursued aggressive dividend maximization policies in anticipation of the reform exhibit lower profits and economic activity after the reform, but retain earnings and accumulated assets at a comparable or faster rate than others. The authors interpret these results as indicating both the existence of real tax responses and supporting the notion that in the presence of dividend taxation, closely held firms partially serve as tax shelters.

David Albouy, University of Illinois at Urbana-Champaign and NBER, and Andrew Hanson, Marquette University

Tax benefits to Housing and Inefficiencies in Location and Consumption

Tax benefits to owner-occupied housing provide incentives for housing consumption, offsetting disincentives the property tax causes. These benefits also help counter the penalty federal taxes impose on households who work in productive high-wage areas, but also reinforce incentives to consume local amenities. Albouy and Hanson simulate the effects of these benefits in a calibrated model, and determine the consequences of various tax reforms. Reductions in tax benefits generally increase efficiency in consumption, but reduce efficiency in location, unless they are accompanied by tax-rate reductions. The most efficient policy would eliminate tax benefits and index taxes to local wage levels.

Christopher Knittel, MIT and NBER

The Political Economy of Gasoline Taxes: Lessons from the Oil Embargo

From 1864 to 1972, the real price of oil fell by, on average, over one percent per year. This trend changed dramatically when prices for crude oil increased by over 650 percent from 1972 to 1980. Policymakers adopted several policies designed to keep oil prices in check and reduce consumption. Absent from these policies were taxes on either oil or gasoline, prompting a long economics literature on the inefficiencies of these policies. In this paper, Knittel reviews the policy discussion related to the transportation sector that occurred at the time through the lens of the printed press. In doing so, he pays particular attention to whether gasoline taxes were "on the table," as well as how consumers viewed the policies that were ultimately adopted. The discussions at the time suggest that meaningful changes in gasoline taxes were on the table, and there seemed to be more public discussion than there is today. Some in Congress and many presidential advisers in the Nixon, Ford, and Carter administrations supported and proposed gasoline taxes. The main roadblocks for taxes were Congress and the American people. Polling evidence at the time suggests that consumers preferred price controls, rationing, and vehicle taxes over higher gasoline taxes or letting gasoline prices clear the market. Given the prominence of rationing and vehicle taxes, it seems difficult to argue that these alternative polices were adopted because they hide their true costs.

Joshua Rauh and Jules van Binsbergen, Stanford University and NBER, and Robert Novy-Marx, University of Rochester and NBER

The Impact of Discount Rate Smoothing on PBGC Liabilities

In this paper, van Binsbergen, Novy-Marx, and Rauh price Pension Benefit Guaranty Corporation (PBGC) single-employer pension insurance as an exchange option, as an alternative to the calculations of expected future PBGC payouts in the PBGC Exposure Reports. These options pricing techniques provide closed form solutions for the fair market price of the PBGC guarantee of each plan that are consistent with the finance principles of risk-neutral pricing, reflecting the fact that bad outcomes tend to coincide with times when losses are particularly painful. In contrast to options pricing approaches in the past literature, the authors' valuation of the PBGC insurance is consistent with each plan's market-implied default probability, as well as plan level data on each plan’s actual accrual rates of new benefits. Assuming liabilities have a 15-year duration, the authors calculate that total single-employer sponsor liabilities would be $1.27 trillion using discount rates for default-free government liabilities. Because the PBGC insurance only pays off in the event of default, and only then up to pre-specified caps, the authors find under their baseline scenario that the PBGC's insurance of the unfunded liabilities is worth $358 billion, net of the estimated present value of PBGC premiums.

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