2009 Tax Policy Colloquium abstracts

Download 2009 seminar papers and abstracts.

Summaries of papers

Lessons from the study of taxes and the behavior of US multinational corporations

Rosanne Altshuler

Company taxation in New Zealand

Matt Benge and David Holland

The paper examines possible future directions for New Zealand’s company tax system. It does not consider radical reform options, such as ACE or cashflow taxation, but concentrates on approaches with rates and structures within OECD norms. A cornerstone of New Zealand’s tax paradigm has been the alignment of the company and top personal tax rates. The paper outlines the problems arising from the divergence of these rates in recent years. It examines a number of possible approaches drawn from international experience for resolving these problems for New Zealand.

The personal income tax structure: A theory and policy

John Creedy

There is now a large and complex literature on optimal income taxation, within the context of second-best welfare economics. This paper considers the potential role of this analysis in the practical design of direct tax and transfer structures. It is stressed that few results are robust, even in simple models, in view of the important role played by alternative social welfare functions, the nature of the distribution of abilities and the preferences of individuals. In view of these negative results, it is suggested that a range of empirical tax analyses, capturing particular issues, can provide helpful guidance for policy analysts. Numerical illustrations are provided, paying attention to the role of a `top' marginal tax rate applied to higher-income groups. In particular, behavioural microsimulation models can be used to examine marginal direct tax reform. Such models have the advantages of capturing the full extent of population heterogeneity and the complexity of the tax structure.

Employment incentives for sole parents: Labour market effects of changes to financial incentives and support

Jacinta Dalgety, Dr Richard Dorsett, Philip Spier, Steven Johnston

This paper presents the results of evaluating the impact of a series of changes in financial incentives and support for working, including subsidised childcare, on sole parents' labour market behaviour. The evaluation of the effect on employment was carried out using difference-in-differences analysis. The effect on benefit receipt was examined using survival analysis. This paper describes these methods and their implementation. Separating the impact of the policy changes from the impact of the economy is a challenge. Trends in benefit receipt, employment rates of sole parents and qualitative findings all indicate that the labour market behaviour of sole parents has changed between 2004 and 2007, the period during which the changes to financial incentives and support for working were implemented. However, during this time New Zealand also experienced strong economic growth and a tight labour market, which are likely to have had an impact on employment outcomes. The two methods chosen control for the strong economy and allow conclusions to be drawn about the impact due to the changes in financial incentives and support for work.

Carbon taxes vs tradable permits: Efficiency and equity effects for a small open economy

John Freebairn

The growth effects of corporate and personal tax rates in the OECD

Norman Gemmell, Richard Kneller and Ismael Sanz

Economic effects of investment subsidies

Jane G. Gravelle

This paper will address two issues. The first is the potential magnitude of effects on the economy from investment subsidies, including the enhancement of long-run standards of living in closed and open capital-importing economies. These outcomes depend on the elasticity of demand for capital within the country (how substitutable capital is for labor) and on supply elasticities, of saving in a closed economy, and of inbound capital in a closed capital-importing economy. They can also be altered by any behavioral effects from alternative sources of revenue. The analysis in the paper suggests that very large amounts of revenue may be foregone for relatively small gains, particularly in open capital importing economies. The second set of issues involve the pitfalls in design of investment subsidies, including the difficulty of designing and enacting neutral subsidies that will not lead to welfare losses from distortions in the allocation of capital, and of the possibilities of negative tax burdens for debt financed investment. Investment subsidies have generally favored equipment investment, and arguments advanced for favoring these assets are difficult to justify. Large investment subsidies for debt financed investment can lead to very low or negative tax burdens, which are difficult to justify on any grounds.

Tax and economic growth

Christopher Heady

This paper investigates the design of tax structures to promote economic growth. It suggests a 'tax and growth' ranking of taxes, confirming results from earlier literature but providing a more detailed disaggregation of taxes. Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes. Recurrent taxes on immovable property appear to have the least impact. A revenue neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption. The paper breaks new ground by using data on industrial sectors and individual firms to show how re-designing taxation within each of the broad tax categories could in some cases ensure sizeable efficiency gains. For example, reduced rates of corporate tax for small firms do not seem to enhance growth, and high top marginal rates of personal income tax can reduce productivity growth by reducing entrepreneurial activity. While the paper focuses on how taxes affect growth, it recognises that practical tax reform requires a balance between the aims of efficiency, equity, simplicity and revenue raising.

Modelling labour supply responses in Australia and New Zealand

Guyonne Kalb

This paper aims to describe two sets of labour supply models, for Australia and New Zealand respectively. Both models use a similar specification; they are discrete choice structural labour supply models incorporating a large amount of detail on the relevant tax and transfer systems. The Australian models are based on Survey of Income and Housing Cost data between 1994 and 1998, and on data between 1999 and 2004, the New Zealand models are based on Household Economics Survey data between 1991 and 2001. In both countries, separate models are estimated for single men, single women, single parents and couple families. Average wage elasticities are derived and compared for a range of different subgroups.

Cost sharing and allowance allocation in a nutrient trading system for the Lake Rotorua catchment

Suzi Kerr, Kelly Lock and Marianna Kennedy

This paper clarifies how the benefits and costs of water quality improvements in Lake Rotorua are likely to be shared in the absence of a trading system; presents different perspectives on and principles for deciding how costs should be allocated; and then shows how different options for initially allocating nutrient allowances and achieving reductions in the cap over time conform with those cost-sharing principles. There is no ‘correct’ answer to the question of who should pay. The ‘best’ answer for Lake Rotorua will depend on what the community thinks is fair and what will be politically feasible. If the trading market does not operate efficiently, the way that allowances are allocated will affect the efficiency with which the catchment achieves its environmental goal. If the allocation of allowances provides significant capital it could also affect economic behaviour by loosening capital constraints that limit land development and mitigation.

Australian tax reforms: Past and future

Greg J Smith

Tax reform is under consideration again in Australia following the Government’s establishment of the Review of Australia’s Future Tax System. This paper provides a broad survey of past reform and future opportunities in Australia. Over the past 25 years, Australian tax reform has been based on two main economic propositions: that taxes should fully fund general government expenditures over the economic cycle and that tax neutrality, through broader tax bases and lower rates, minimises adverse effects on economic efficiency. Equally, tax and transfer arrangements have continued to be based heavily on income, and on delivering steep progressivity. The intrinsic complexities and idiosyncrasies of the income base and progressive rates provide ongoing fertile ground for reform-minded policy attention. The consequences of heavily working this tax base underpin much of the review task: addressing high marginal tax rates, relatively high taxes on capital and saving relative to labour and current consumption, and options for tax design of a range of 21st century developments will also be considered. These include the long-run competitiveness of the Australian economy in a restructuring world economy, the threats and opportunities of technological innovation, and concerns about the performance of specific markets, such as for household savings, affordable housing, and transport infrastructure. Taking a system-wide approach, with a renewed interest in simpler tax arrangements, the Future Tax System Review may well open a wider approach to tax reform than has hitherto been attempted in Australia.

Dual Income Taxes: A Nordic Tax System

Peter Birch Sørensen

In the early 1990s the Nordic countries introduced the so-called dual income tax which combines progressive taxation of labour income with a low flat uniform tax on all income from capital. This paper explains the historical background for the ambitious Nordic tax reforms and discusses the rationale for the dual income tax. It then describes the practical implementation of the dual income tax in Finland, Norway, and Sweden. A central issue raised by the dual income tax is how to separate labour income from capital income and how to prevent taxpayers from shifting income from one tax base to the other with the purpose of reducing total tax liability. In particular, the dual income tax requires that income from small businesses be split into a labour income component and a capital income component. The paper discusses alternative ways of achieving this split and describes the principles of business income taxation and the methods of corporate-personal income tax integration adopted in the Nordic dual income tax countries.

International taxation and company tax policy in small open economies

George R. Zodrow

This paper examines company income tax policy in the presence of increasing globalisation from the perspective of a small open economy. It focuses on the implications of international capital (and labor) mobility and international tax competition. The paper begins by considering the arguments for tax exemption or even subsidisation of capital income, and then examines the many qualifications to these arguments that in practice lead to significant levels of taxation of capital income. This analysis pays particular attention to the implications of the existence of firm-specific and location-specific economic rents and the issues raised by various forms of international tax avoidance. The paper then traces out the implications of the analysis for company income tax policy in a small open economy, and discusses applications of the analysis to the case of New Zealand.

Panel discussion on key issues for the future