Bancu Cristian-Alexandru [604533]

Bancu Cristian-Alexandru

The effects of taxation

1.
Introduction

Starting
from
the
early
part
of
the
20th
century,
the
taxation
of
business
profits
or

income
has
started
to
become
a
norm.
As
state
revenue
needs
became
increasingly
significant

with
the
growth
of
military
and
welfare
spending,
most
industrial
capitalist
countries

switched
from
reliance
on
a
multiplicity
of
specific
duties,
in
particular
high
customs
tariffs,
to

general,
direct
taxes
on
income.
The
acceptance
of
direct
taxes
rests
on
their
application,

as
far
as
possible
equally,
to
income
or
revenues
from
all
sources,
including
business

profits.
Since
many
businesses
operated
on
global
markets,
this
raised
the
question
of
the

jurisdictional scope of taxation.

During
the
first
half
of
this
century,
international
business
profits
resulted
mainly

from
foreign
trade
and
portfolio
investment
abroad.
Therefore,
concern
focussed
mainly
on

defining
where
profits
from
international
sales
were
deemed
to
be
earned,
and
where
a

company
financed
from
abroad
should
be
considered
taxable.
The
question
of
export

profits
was
broadly
resolved
by
developing
a
distinction
between
manufacturing
and

merchanting
profit,
and
allocating
the
latter
to
the
importing
state
if
the
sale
was
attributed

to a permanent establishment.

Each
state
had
to
adapt
its
tax
measures
to
its
international
payments
and
investment

flows,
due
to
the
expansion
of
state
taxation
of
income,
including
business
profits
or
income.

Oppositions
and
differential
treatment
between
states
led
to
pressures
from
business
for
the

elimination
of
international
double
taxation.
Although
early
longings
of
a
broad
multilateral

agreement
allocating
jurisdiction
to
tax
were
soon
dashed,
a
permissive
system
for
the

coordination of tax jurisdiction was assiduously created.

The
taxation
of
international
business
is
a
vital
political
and
social
issue,
as
well
as

raising
many
fascinating
legal,
political
and
economic
questions.
Taxation
is
the
point
of
most

direct
interaction
between
government
and
citizens,
the
state
and
the
economy.
Yet
the

technical
complexities
of
taxation
often
make
informed
debate
difficult.
This
purpose
of
this

paper
is
to
correlate
the
various
taxing
methods
with
several
aspects,
such
as
foreign
direct

investments,
gross
domestic
product,
gross
domestic
product
per
capita,
brown
field
investments

and greenfield investments.

2. Tax trends

In
spite
of
cross-country
variations
in
the
tax
structure,
most
countries
belonging
to

OECD,
trust
on
three
main
sources
of
tax
revenues:
taxes
on
goods
and
services,
social
security

contributions
and
personal
and
corporate
income
taxes.
While
the
revenue
shares
of
corporate

income
taxes
and
social
security
contributions
have
increased,
there
has
been
a
reduction
during

the
past
three
decades
in
the
share
of
tax
revenues
accounted
for
by
personal
income
tax.
With

the
mix
of
taxes
on
goods
and
services
changing
noticeably
towards
greater
use
of
general

consumption
taxes
such
as
VAT
and
away
from
taxes
on
specific
goods
and
services,
the
share

of
consumption
taxes
in
total
revenues
has
declined.
Over
the
years,
the
share
of
property
taxes

and environment-related taxes has been roughly constant.

A
trend
towards
flatter
personal
income
tax
schedules
has
occurred
in
many
OECD

countries.
The
reduction
in
the
top
statutory
income
tax
rates
represents
one
of
the
most

pronounced
changes
in
personal
income
taxation.
On
the
other
hand,
average
workers
have
not

seen
their
taxes
being
reduced
to
the
same
extent.
Various
in-work
tax
measures
have
been

introduced by a number of countries to sustain work incentives of marginal workers.

The
cut
in
the
personal
income
tax
standard
has
been
followed
by
reductions
in
the

corporate
income
tax
rate,
partially
sustained
by
base
expanding
in
many
countries.
Besides,
the

overall
top
marginal
rate
on
dividends
has
been
reduced
mainly
as
a
follow
up
of
the
reduction
in

the
corporate
income
tax
rate.
Some
countries
have
popularised
tax
incentives
for
investment
in

research and advancement.

3. Foreign direct invest ment

4. GDP per capita

Policy options

“The tax protocol changes which are allegedly to increase prosperity in any particular

country will bank on its starting point. This is meant both in terms of its present tax system and

areas such as employment, investment or yield expansion in which its current economic

performance. The discussed reforms should be seen as modest tax changes rather than implying

that shifting the revenue base entirely to one particular tax policy provides more of a growth

bonus since it is feasible that there are diminishing growth returns to fine-tuning taxes.”

A yield neutral tax reform orientated on expansion would be to transfer a section of the

revenue base from income taxes to less distortive taxes. Tariff on residential property are

inclined to be best for growth. Yet, the scope for diverting revenue to recurrent taxes on

immovable property is restricted in most countries both because these taxes are currently

collected by sub-national governments and because these taxes are particularly avoided. Thus,

although the perks of drawing on an immovable tax base in an era of globalisation, a only

handful of countries manage to increase substantial revenues from property taxes, with returns on

housing generally taxed more softly than returns on other assets.

In down-to-earth protocol terms, a larger revenue shift could probably be carried out into

consumption taxes. Nonetheless, with consumption taxes being less progressive than personal

income taxes, or even regressive, a transfer in the tax system from personal income to

consumption taxes would diminish growth. In addition, shifting from corporate to consumption

taxation would surge share prices by increasing the aftertax present value of the enterprise, and

wealth imbalance as well as increasing income inequality by decreasing capital income taxation.

Tax shifts like these therefore involve a non-trivial trade-off between tax policies that build up

GDP per capita and equity, which is expected to be assessed separately cross-countries belonging

to OECD.

Bettering the design of individual taxes should be a priority since shifting the balance

between different tax sources should not been seen as a backup. Truly, the reorganisation of

individual taxes can encourage a revenue shift. A better way of increasing their revenues, is by

broadening the base of consumption taxes rather than rate increases, since a broad base increases

productivity efficiency while a high rate inspires the growth of the shadow economy. More

broadly, most taxes would gain from a mix of base broadening and rate reduction.

Reading into income taxes, expecting less from corporate income relative to personal

income taxes could increase performance. Nonetheless, decreasing the corporate tax rate

considerably below the top personal income tax rate can threaten the integrity of the tax system

as high-income individuals will pursuit to protect their savings within businesses.

Paying attention to personal income taxation, there is also confirmation that flattening the

tax schedule could be useful for GDP per capita, mainly by sustaining entrepreneurship. Once

again, this suggests an adjustment between growth and equity.

Labour utilisation

Whether
the
goal
is
to
increase
participation
or
worked
hours,
improvements
of
labour

income
taxation
will
usually
have
to
vary.
For
raising
participation,
a
desirable
reform
would
be

decreasing
the
regular
labour
taxes.
On
the
other
hand,
lowering
marginal
rates
may
be

preferable
for
increasing
hours
worked.
A
more
effective
approach
would
be,
however,
to
take

into
account
the
effects
combining
the
two
reforms
with
existing
benefits.
The
main
target

population
being
the
low-skilled
workers
or
second-earners,
which
might
influence
the
effective

average
and
marginal
tax
rates.
An
increase
in
income
diversity
might
be
the
result
of
reductions

in
the
marginal
tax
rate.
Furthermore,
the
effects
of
reforms
in
labour
taxes
on
employment
are

also
prone
to
be
influenced
by
labour
market
institutions,
such
as
wage-setting
structures
and

minimum wages, which influence the pass through of taxes on to labour price.

Diminishing
the
progressivity
of
the
personal
income
tax
schedule,
there
may
bring

benefits
in
the
quantity
of
labour
force,
as
well
as
in
its
quality.
Highly
progressive
income
tax

schedules
seem
to
have
a
negative
effect
on
GDP
per
capita,
both
through
lowering
labour

utilisation and productivity. This would discourage investments in higher education.

This
would
signifies
a
possible
trade-off
between
growth
oriented
tax
policies
and

distributional
aspects.
Nonetheless,
there
may
be
labour
tax
reforms
in
this
area
that
would

benefit
both.
Take
for
instance,
“in-work
benefits”
boost
the
earnings
of
low-income
households,

hence
reducing
inequality,
and
may
also
increase
efficiency
if
the
benefit
in
labour
supply

participation
exceeds
the
disadvantageous
incentives
on
hours
worked
by
labour
workers
and
on

human
capital
formation,
as
the
returns
from
educating
the
skills
are
reduced,
as
well
as
the

distortionary costs of the tax increases that are essential in order to pay for the in-work benefits.

Investment

Reducing
corporate
tax
rates
and
removing
special
tax
relief
can
enhance
investment
in

various ways.

Firstly,
if
one
of
the
main
goals
is
to
reduce
distortions
that
hold
back
the
level
of

domestic
investment
and
to
draw
foreign
direct
investment,
decreasing
the
corporate
tax
rate

would represent a better action to reducing personal income taxes on dividends and capital gains.

Favourable
tax
treatment
of
investment
in
small
firms
may
be
ineffective
in
raising

overall
investment.
Thus
removing
it
and
lowering
the
corporate
tax
rate
may
also
raise
the

quality of investment by decreasing possible tax-induced distortions in the selection of assets.

References

International Business Taxation A Study in the Internationalization of Business Regulation

http://www.taxjustice.net/cms/upload/pdf/Picciotto%201992%20International%20Business%20
Taxation.pdf

https://www.oecd.org/mena/competitiveness/41997578.pdf

http://www.budgetmodel.wharton.upenn.edu/issues/2016/7/14/effects-of-income-tax-changes-on
-economic-growth

https://blog.supplysideliberal.com/post/24177817600/can-taxes-raise-gdp

http://www.nber.org/digest/mar08/w13264.html

https://www.brookings.edu/research/effects-of-income-tax-changes-on-economic-growth/