Søren Bo Nielsen

Capital income and profit taxation with foreign ownership of firms

Abstract This paper establishes optimal rules for capital income and profits taxation in the open economy with or without foreign ownership of domestic firms. We show that if there are constraints on the feasibility of profits taxation, both saving and investment taxes generally enter the optimal tax package. If instead profits can be fully taxed, then source-based investment taxes vanish. If domestic firms are in part owned by foreigners, then source-based investment taxes can be used to shift income away from these to domestic citizens and they may even be used to finance lump sum transfers to domestic residents.

On the optimality of the Nordic system of dual income taxation

Abstract In recent years the Nordic countries have introduced a so-called dual income tax which combines a proportional tax on capital income with progressive taxation of labour income. The paper argues that this asymmetric treatment of the two types of income can be defended on pure efficiency grounds, because the progressivity of the labour income tax serves to reduce the private return to human capital investment, thereby offsetting the tendency of a proportional comprehensive income tax to discriminate in favour of such investment. The analysis is based on an overlapping generations model of a small open economy where consumers face a trade-off between investment in human capital and investment in non-human capital. Extended versions of the model allow for liquidity constraints and an endogenous labour-leisure choice.

A simple model of commodity taxation and cross-border shopping

This paper sets up a simple model in which two countries, differing in geographical extent, engage in commodity tax competition originating in opportunities for cross-border shopping. The non-cooperative tax equilibrium and various coordination initiatives are examined in the benchmark model and in two model extensions incorporating (i) costs of transportation for goods and (ii) border inspection. Among the more surprising results are the following: with (i), pure profits accrue to sellers near the border, but subjecting them to tax may lower the countrys total tax revenue; with (ii), the volume of cross-border shopping may well increase. Copyright 2001 by The editors of the Scandinavian Journal of Economics.

Start-ups, venture capitalists, and the capital gains tax

A model of start-up finance with double moral hazard is proposed. Entrepreneurs have ideas but lack own resources as well as commercial experience. Venture capitalists provide start-up finance and managerial support. Both types of agents thus jointly contribute to the firms success, but neither types effort is verifiable. We find that the market equilibrium is biased towards inefficiently low venture capital support. In this situation, the capital gains tax is particularly harmful. The introduction of a small tax impairs managerial advice and leads to first order welfare losses. Once the tax is in place, limitations on loss off-set may paradoxically contribute to higher quality of venture capital backed entrepreneurship and welfare.

Formula Apportionment and Transfer Pricing Under Oligopolistic Competition

This paper demonstrates that under conditions of imperfect (oligopolistic) competition, a transition from separate accounting (SA) to formula apportionment (FA) does not eliminate the problem of profit shifting via transfer pricing. In particular, if affiliates of a multinational firm face oligopolistic competition, it is beneficial for the multinational to manipulate transfer prices for tax-saving as well as strategic reasons under both FA and SA. The analysis shows that a switch from SA rules to FA rules may actually strengthen profit shifting activities by multinationals.

Taxes and Venture Capital Support

In this paper we set up a model of start-up finance under double moral hazard. Entrepreneurs lack own resources and business experience to develop their ideas. Venture capitalists can provide start-up finance and commercial support. The effort put forth by either agent contributes to the firms success, but is not verifiable. As a result, the market equilibrium is biased towards inefficiently low venture capital support. The capital gains tax becomes especially harmful, as it further impairs advice and causes a first-order welfare loss. Once the capital gains tax is in place, limitations on loss off-set may paradoxically contribute to higher quality of venture capital finance and welfare. Subsidies to physical investment in VC-backed start-ups are detrimental in our framework.

Withholding taxes or information exchange: the taxation of international interest flows

Abstract This paper considers withholding taxes and information exchange as alternative means to tax international interest income. For each regime, we consider the maximum level of taxation of foreign-source income that can be sustained as the equilibrium of a repeated game. The best regime is the one that brings the level of taxation in the repeated game closest to the cooperative level of interest taxation. Sustainable levels of taxation in either regime depend on the importance of bank profits and on the marginal cost of public funds, among other things. Simulations with the model illustrate the choice between withholding taxes and information exchange. An explicit possibility is the emergence of a mixed regime, with one country imposing a withholding tax and the other country providing information. The basic model is extended to allow for size differences between the two countries and to incorporate a third, outside country.

Environmental policy, pollution, unemployment, and endogenous growth

The paper develops a model of endogenous economic growth with pollution externalities and a labor market distorted by union monopoly power and by taxes and transfers. We study the optimal second-best pollution tax and abatement policy and find that a shift toward greener preferences will tend to reduce unemployment, although it will hamper growth. We also find that greater labor-market distortions call for higher pollution tax rates. Finally, we show that a switch from quantity control of pollution combined with grandfathering of pollution rights to regulation via emission charges has the potential to raise employment, growth, and welfere without damaging the environment.

Tax evasion in an open economy:: Value-added vs. income taxation

Abstract Ignoring tax evasion possibilities, a value-added and a cash-flow income tax have similar behavioral and distributional consequences. Yet the available means of tax evasion under each can be very different. Under a VAT, avoidance occurs through cross-border shopping, whereas under an income tax it can occur through shifting taxable income abroad. Given evasion, we show that a country would make use of both taxes in order to minimize the efficiency costs of evasion activity, relying relatively more on whichever tax is harder to evade. We then make use of aggregate Danish tax and accounting data from 1992 to measure the amount of evasion that occurred under the two taxes. While the estimates of evasion activity are small, the figures imply that Denmark could reduce the real costs of evasion activity by relying more on value-added taxes.

Capital income taxation in a growing open economy

The paper studies the dynamic macroeconomic effects of various forms of capital income taxation in a model of a small open economy with perfect mobility of financial capital and intertemporal optimization on the part of households and firms. One of the noteworthy results is that the introduction of a (low) corporate income tax will not affect consumption in the long run, but will simply lead to a replacement of shares by foreign financial assets in household portfolios. It is also found that an anticipated investment tax credit can have and that an anticipated dividend tax will have contractionary effects on investment before they are introduced. Moreover, it is shown that while an unanticipated dividend tax is neutral with respect to investment, it will have real effects on consumption and net foreign assets in a growing economy.