estimating the tax advantage of corporate debt this paper presents estimates of the effective tax value of incremental interest deductions for corporations taking into account that they may not be able to utilize all their interest deductions fully because of either insufficient taxable income or the availability of nondebt tax shields after describing particular features of the tax code which may drive a wedge between statutory and effective tax rates for debt finance we present estimates using the treasury corporate tax model of effective tax rates for a variety of industry groupings our estimates suggest that the after tax cost of debt varies widely across industries the magnitude of the effective tax advantage to debt finance has important implications for corporate financial behavior one issue which has been examined extensively in the corporate finance literature is whether the value of the firm is affected by the firm s leverage ratio in a recent contribution deangelo and masulis 3 have shown that financing decisions can affect the value of the firm if the effective tax advantage to debt finance varies among firms or is reduced by the presence of nondebt tax shields such as investment tax credits and depreciation deductions the effective tax advantage to debt is also an important determinant of leverage related costs gordon and malkiel 5 have recently used the statutory tax rate to estimate expected bankruptcy costs induced by the corporate tax when the firm is assumed to balance the marginal tax advantage to debt with marginal expected bankruptcy costs if however the effective tax rate for interest deductions falls short of the statutory rate the magnitude of these costs may be overstated this paper presents detailed estimates of the marginal effective tax advantage to debt finance our estimates based on data in the treasury 1978 corporate master statistical file and on simulations done with the treasury corporate tax model quantify the impact of increasing interest deductions without changing other items on the corporation s income statement 1 we simulate the impact of a change in a firm s capital structure holding its investment and production decisions constant this is an appropriate procedure for estimating the marginal

measuring and improving the performance of customs valuation controls an illustration with gabon modern customs administrations aim to both facilitate legal trade and combat fraud to meet this dual objective many customs administrations in developing countries must give risk management a highly prominent role in this context of modernisation this paper first provides stylised facts on the performance of the customs controls carried out at the gabon border then we compare gabon s granular import customs data with international trade statistics based on this comparison we identify undetected fraud and present a methodology to target ex post audits finally we define indicators to monitor the performance of customs valuation controls

the long run relationship between nominal interest rates and inflation the fisher equation revisited stable url http links jstor org sici sici 0022 2879 28199602 2928 3a1 3c102 3atlrbni 3e2 0 co 3b2 2journal of money credit and banking is currently published by ohio state university press your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals ohio press html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgmon aug 27 13 58 08 2007

tax adjusted discount rates this paper develops models for discount rates that are adjusted for the interest tax shields of an infra marginal firm in a general tax equilibrium where there is cross sectional variation in corporate tax rates under the assumption that the firm optimally maintains a predetermined debt ratio a tax adjusted riskless discount rate model is given for valuing certainty equivalents and a tax and risk adjusted discount rate model is given for valuing expected cash flows for the latter case the asset equity debt and tax shield betas are derived and a weighted average cost of capital interpretation is given the tax adjusted capm apt security market lines for expected returns in stock and bond markets both have the same slope but different intercepts a formula is also provided for the present value of the interest tax shield when the firm optimally maintains a predetermined debt level the analysis here also differs from the existing literature in the following respects it allows for cross sectional variation in corporate tax rates and personal tax rates it shows that the market values of risky and riskless interest tax shields differ only to the extent that tax laws provide for nonlinear taxation of gains and losses it also shows that interest tax shields should be discounted at a tax adjusted discount rate that reflects the fact that they accrue to equity investors rather than debt investors continuous time simplifications of the formulas in this paper and the previous literature are also given

testing for the long run relationship between nominal interest rates and inflation using cointegration techniques 1989 testing for the long run relationship between nominal interest rates and inflation using cointegration techniques applied economics vol 21 no 4 pp 439 447

tax clienteles and optimal capital structure under uncertainty this article demonstrates that investors heterogeneous tax status implies that they value bonds differently at the margin due to asymmetric personal taxes high risk bonds generate a higher amount of taxable income than low risk bonds and are therefore held by investors in low tax brackets in such a setting firms can increase their value by choosing a capital structure that attracts a particular bondholder clientele the author analyzes how bondholder clienteles change as the uncertainty about a bond s final payoff is resolved over time and shows how tax clientele effects influence firms capital structure decisions copyright 1990 by the university of chicago

trade policy making in a small island economy the wto review of the maldives the purpose of this paper is to examine trade policy regime and trade related development issues in the maldives on the basis of the trade policy review maldives 2003 of the wto the key theme of the paper is that given the narrow resource base and small domestic market openness to foreign trade and investment remains the natural policy choice for a small developing economy like the maldives since the late 1980s the maldivian government has made considerable progress in implementing policy reforms driven by this conviction however the reform process is far from complete high import tariffs maintained predominantly on revenue considerations a large direct role played by the public sector in foreign trade and some key sectors of the economy lack of transparency in duty concessions and other investment incentives failure to incorporate environmental concerns as part of the national development policy and delays in meeting reform commitments under the wto are among the key items of the unfinished reform agenda

political institutions and central bank independence a cross country analysis using three quantitative measures of central bank independence we apply ols and tsls regression methods to investigate the possible correlation between political liberty political instability and central bank independence for a sample of western democracies and highly democratic developing countries we show that cukierman s legal independence index is positively correlated with political freedom and regime political stability it is negatively correlated with party political stability for a sample of developing countries that excludes dictatorships we show that a special index of legal central bank autonomy is positively associated with political freedom and political stability finally we observe that for the same sample of nations the turnover index of central bank independence is not sensitive to our political variables

the economy wide impacts and risks of malawi s farm input subsidy program we estimate the impact of malawi farm input subsidy programme using an economywide approach we find potentially substantial net benefits with indirect benefits accounting for about two fifths of total benefits due to these indirect benefits the cut off

taxing times taxation divided societies and the informal economy in northern nigeria this paper challenges the notion that taxing the informal economy provides a mechanism for increasing popular political voice and rebuilding the social contract it contends that current arguments for taxing the informal economy suffer from a eurocentric understanding of taxation and state formation and a fiscally essentialist and undifferentiated notion of the informal economy drawing on fieldwork in northern nigeria this paper shows that history gender wealth and ethno religious identity influence how taxing the informal economy shapes governance outcomes evidence from nigeria suggests an inverse relationship between informal economy taxation and political voice posing the risk that increased taxation will exacerbate social divisions rather than rebuild the social contract

fiscal policy in a simple two country dynamic model abstract this paper analyzes the national and international effects of labor and capital income taxes in a two country infinite horizon perfect foresight neoclassical model with endogenous labor supply and capital accumulation two polar regimes of capital income taxation are considered the source based and the residence based the qualitative effects of labor income taxes are shown to be independent of the taxation regime whereas the effects of capital income taxes are not

toward a theory of regulation for developing countries following jean jacques laffont s lead the efficient operation and expansion of infrastructures in developing countries is crucial for growth and poverty reduction however recent reforms aimed at improving the performance of these sectors have had limited success evidence suggests that in many instances this was because the traditional regulatory theory relied on by policymakers was not suitable for the institutional context in developing countries this article surveys more recent theoretical work focusing on problems with regulation in these countries at the heart of the survey is the work of jean jacques laffont who in the last decade of his life set about developing a theoretical framework for regulation in developing countries we consider the implications of his work which focused on the key institutional limitations faced in developing countries we then discuss where experience suggests that there are important omissions from this modeling bringing in extensions and alternative approaches pursued by other authors we conclude by summarizing the key ways in which regulatory policy will be different when institutions are weak overall we find that an understanding of the institutional context and its implications are crucial when designing a regulatory framework for developing countries

globalization and rural poverty as is common in most contentious public debates different people mean different things by globalization some interpret it to mean the global reach of new technology and capital movements some refer to outsourcing by domestic companies in rich countries others protest against the tentacles of corporate capitalism or us hegemony economic military or cultural in this chapter i shall limit myself to interpreting globalization simply as openness to foreign trade and long term capital flows i shall ignore here the important issues arising from the devastation caused to fragile economies by billions of dollars of volatile short term capital stampeding around the globe in herd like movements or the substantial poverty reducing potential of international unskilled labour flows from poor to rich countries even if allowed in temporary and regulated doses

taxation and political mobilization evidence from andhra pradesh abstractthis article empirically investigates whether there are differences in a region s taxation burden on the basis of support for the centralized state government in the indian state of andhra pradesh using randomness introduced by close election outcomes this article finds that the government collected less tax revenues where opposition parties were more successful the decline in tax revenue was most likely targeted at agricultural producers and a similar pattern is found in other available agricultural policies these results are consistent with a model in which it is optimal for a centralized government to catch up in elections it trails as opposed to bolstering existing leads furthermore these results suggest that taxation responds to electoral pressures and that agricultural producers in particular are targeted during times of political competition

on the fisher effect abstract we use post war quarterly data for belgium canada denmark france germany greece ireland japan the netherlands the united kingdom and the united states to examine the fisherian link between inflation and short term nominal interest rates in doing so we apply the king and watson 1997 methodology paying particular attention to the integration and cointegration properties of the variables since meaningful fisher effect tests critically depend on such properties we conclude that the data are generally rejecting the fisher effect

long term drivers of taxation in francophone west africa 1893 2010 abstract which factors have driven fiscal revenue in sub saharan africa in the long run we address this question by studying quantitatively the long term relationship between fiscal outcomes economic expansion and external dependency in four francophone west african countries benin cote d ivoire niger and senegal between 1893 and 2010 using panel co integration modelling we find a long term relationship between on the one hand tax revenue and local economic development proxied by international trade and on the other hand tax revenue and developments of the economy and taxation in the former colonizing power france the results indicate that economic expansion has been a significant factor in driving the long term development of tax revenue in west africa just as it was in historical europe but also point to the historical vulnerability and external dependency of the fiscal systems of the four west african countries we suggest that the wider implication of these results is that they point to the importance of deepening our understanding of how domestic contexts interact with external economic and institutional external forces to shape african fiscal systems in contrast to factors such as inter state warfare that are ubiquitous in narratives of historical european taxation and state development

the fisher effect and the term structure of interest rates tests of cointegration the literature on the fisher effect has ignored the potential relationship between inflation and long term interest rates using an expectations model of the term structure of interest rates the authors establish the conditions under which innovations in short term inflation will be transmitted to long term as well as short term interest rates cointegration tests find support for both the fisher effect and the expectations theory of the term structure copyright 1993 by mit press

no taxation without information deterrence and self enforcement in the value added tax abstract claims that the vat facilitates tax enforcement by generating paper trails on transactions between firms contributed to widespread vat adoption worldwide but there is surprisingly little evidence this paper analyzes the role of third party information for vat enforcement through two randomized experiments among over 400 000 chilean firms announcing additional monitoring has less impact on transactions that are subject to a paper trail indicating the paper trail s preventive deterrence effect this leads to strong enforcement spillovers up the vat chain these findings confirm that when taking evasion into account significant differences emerge between otherwise equivalent forms of taxation jel d83 h25 h26 k34 o17

the structure and incentive effects of corporate tax liabilities this paper describes situations in which tax liabilities assume the form of a negative position in a call option this structure motivates an examination of the investment decisions of taxed corporations in the presence of risk it is shown that the structure of the tax liability creates an incentive to underinvest in more risky projects and an incentive for conglomerate merger these effects are then evaluated in the presence of conflicts of interest between stockholders and bondholders and under alternative assumptions about the tax code and about the timing of investment and financing decisions this paper makes an observation regarding the functional form assumed by the tax liabilities of corporations with potentially redundant deductions and evaluates its consequences for investment incentives interest and other deductions against taxable income can be taken for the most part only to the extent of that income in a single period model this gives the net tax liability a familiar structure it can be viewed as a call option where the exercise price on the call is the allowable deductions the tax paying entity holds a positive position in the assets which generate the taxable income and a negative position in a call option on those assets the analogy between options and the structure of tax liabilities calls attention to some interesting incentive effects concerning risk using their model of option valuation black and scholes 5 showed that the value of an option is increasing in the variance of the asset it is written on other authors have generalized this result and studied its implications for corporate financing see jagannathan 16 jensen and meckling 17 and green 15 the importance of the risk attributes of the underlying asset in option valuation suggests that taxation may have important incentive consequences for investment decisions involving risk it has been recognized in the public economics literature for some time that asymmetries in the tax schedule can affect risk taking behavior early papers by mossin 20 and stiglitz 25 studied individual portfolio decisions over a riskless and a risky asset our analysis differs from these in a number of respects the most important of these is our use of market valuation rather than expected utility in the decision maker s objective function this is surely a more appropri

infrastructure and public utilities privatization in developing countries should governments in developing countries promote private ownership and deregulated prices in noncompetitive sectors or should they run publicly owned firms and regulate prices at the expense of rents to insiders a theoretical model is used to answer these normative questions the analysis focuses on the tradeoff between fiscal benefits and consumer surplus during privatization of noncompetitive sectors privatization transfers control rights to private interests and eliminates public subsidies yielding benefits to taxpayers at the cost of increased prices for consumers in developing countries where budget constraints are tight privatization and price liberalization may be optimal for low profitability industries but suboptimal for more profitable industries and once a market has room for more than one firm governments may prefer to regulate the industry without a credible regulatory agency regulation is achieved through public ownership

risk returns and values in the presence of differential taxation abstract we show that there exist separate security market lines smls for debt and equity securities in an equilibrium with differential taxation of debt and equity we characterize the conditions under which these smls have the same price of risk with different intercepts and the conditions under which the tax effect of leverage is linear in debt value as in the adjusted present value method we explore the implications of our results for cost of capital calculations how to calculate the cost of capital for debt and equity and how to unlever betas correctly accounting for differential taxation

on the interaction of real and financial decisions of the firm under uncertainty this study analyzes the interaction between the optimal level of investment and debt financing for this purpose a model is structured in which a firm facing an uncertain price has to decide on its optimal level of investment and debt the amount of investment sets a limit on output whose optimal level is determined after price is realized the debt involved is risky there exists a possibility of bankruptcy the analysis proves that investment and its optimal financing have to be simultaneously determined and that a negative relationship exists between operating and financial leverage we also demonstrate that as the tax rate increases optimal capacity decreases and optimal leverage increases an analysis of the impact of changes in the expected price shows that under some conditions an increase in expected price would lead to an increase in optimal investment firm size and a decrease in optimal debt

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

the effect of capital structure on a firm s liquidation decision abstract a firm s liquidation can impose costs on its customers workers and suppliers an agency relationship between these individuals and the firm exists in that the liquidation decision controlled by the firm as the agent affects other individuals the customers workers and suppliers as principals the analysis in this paper suggests that capital structure can control the incentive conflict problem of this relationship by serving as a pre positioning or bonding mechanism appropriate selection of capital structure assures that incentives are aligned so that the firm implements the ex ante value maximizing liquidation policy

arbitrage and martingales with taxation this paper extends the martingale analysis of no arbitrage pricing to worlds with taxation the absence of arbitrage is shown to imply the existence of different shadow prices for income streams that are subject to differing tax treatments for example no arbitrage implies the existence of different martingale measures for capita l gains and for ordinary income when they are differentially taxed andfor item s such as depreciation expenses that influence only after tax cash flows the analysis is applied to several topics in finance including the debt equity decision tax options and the taxation of dividends and pensions copyright 1987 by university of chicago press

measuring protection mission impossible abstract there seems to be some confusion between openness and protection measures in the international trade literature the aim of this paper is to bring together the state of the art in quantifying trade policy measures and for this reason we focus on the extent of the protection granted by policies rather than on the degree of openness of the economy given the considerable amount of literature that deals with these issues we will limit our review as follows on the one hand we focus on trade policies implemented at the border and therefore do not consider all the other possible public interventions influencing trade flows on the other hand we only take into account indexes that explicitly adopt a metric expressed in a scalar aggregate tariff and quota equivalent measures or an index in a closed interval we distinguish between indexes that aggregate across products same barrier for more products and indexes that aggregate across instruments more barriers for the same product finally in order to classify the large number of indexes covered in our review we propose a typology based on three categories incidence outcome and equivalence

does monetary policy affect the long run expectations of non stationary real interest rates in this article we analyse whether the monetary policy affects the long run expectation of the non stationary real interest rate the analysis is conducted through beveridge nelson trend decomposi

short term interest rates as predictors of inflation on testing the hypothesis that the real rate of interest is constant in an innovative and provocative paper in this review eugene fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest ignoring taxes is a constant and that the market for u s treasury bills is efficient in the sense of embodying rational expectations those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output monetary policy and so forth 2 the methodologies which lead to these contradictory conclusions are quite different previous studies had followed the lead of irving fisher by relating nominal interest rates to distributed lags on past rates of inflation 3 these distributed lags are generally interpreted as approximations to the market s expected rate of inflation and thus any remaining variation is attributed to variation in the real rate 4 fama s methodology on the other hand draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation the ex post real interest rate consists by definition of the ex ante real interest rate plus a pure forecasting error 5 the hypothesis of market efficiency implies that these forecasting errors must be serially random thus observing ex post real rates is equivalent to observing ex ante real rates with random measurement error these errors of course confound the problem of identifying variation in the ex ante real rate in this paper we will argue that the relative magnitude of these measurement errors is such that the tests carried out by fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational more powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis of course rejection

from the static to the dynamic some problems in the theory of taxation abstract this paper considers problems and issues that arise when we attempt to extend the static theory of taxation and production planning to a dynamic context and to combine that theory with theories of growth the reasons dynamic theory is less developed include problems with the analytical tractability of even those dynamic models which attempt to retain the basic structure of the static model furthermore difficult and interesting issues arise in a dynamic context which are either not present or are much less severe in the static theory special attention is paid to these new issues and the difficulties they pose

revenue erosion through exemption and evasion in cameroon 1993 abstract the administration of tax statutes materially determines their economic effects a survey of cameroonian businesses a country seemingly typical of its economic level demonstrates widespread erosion of the tax bases paid by businesses through exemptions and evasion businesses seem willing to provide information on these potentially confidential activities the survey provides information on the number of businesses evading taxes or having exemptions on the characteristics of these businesses relative to others on whether businesses maintain information of use to the tax administration on the contacts between the administration and businesses affecting evasion and on penalties imposed by the administration

tax rates and tax evasion evidence from missing imports in china tax evasion by its very nature is difficult to observe we quantify the effects of tax rates on tax evasion by examining the relationship in china between the tariff schedule and the evasion gap which we define as the difference between hong kong s reported exports to china at the product level and china s reported imports from hong kong our results imply that a one percentage point increase in the tax rate is associated with a 3 percent increase in evasion furthermore the evasion gap is negatively correlated with tax rates on closely related products suggesting that evasion takes place partly through misclassification of imports from higher taxed categories to lower taxed ones in addition to underreporting the value of imports

the dynamic effects of tax law asymmetries under the laws of most countries a distinction is made between gains and losses by businesses losses that must be carried forward are subjept to two penalties a loss of interest and expiration previous examinations have focused on the higher expected tax payments such a tax system without full loss offset imposes on risky projects this paper presents a dynamic analysis of the impact of taxation on investment when gains and losses are treated asymmetrically the results demonstrate how firm characteristics and the timing of taxes can influence behaviour under current u s tax law a distinction is made between gains and losses by businesses for corporations gains are taxed at what is essentially a flat rate of 46 while losses do not necessarily qualify for a refund at the same rate to obtain an immediate refund the taxpayer must have had taxable income during the three previous years in excess of the current loss any losses that cannot be carried back in this fashion must be carried forward subject to two implicit penalties such loss carryforwards earn no interest and they expire after fifteen years similar provisions apply in other countries hence businesses investing in risky projects for which the probability of having to carry losses forward is positive can expect to pay higher taxes than they would under a system with full loss offset i e the immediate refund of taxes for losses incurred many corporations

aid nontraded goods and the transfer paradox in small countries this paper constructs a model of the transfer paradox for a small open economy with nontraded goods it demonstrates that increased production of nontraded goods can change their domestic price so as to offset the otherwise beneficial effect of aid and under certain conditions to create a transfer paradox even in a small country the model is estimated with time series data for 44 aid dependent countries for the period 1970 90 the results support the model and show that the nontraded goods expansion effect is more likely to cause immiserization than harry g johnson s 1967 tariff distorting export displacement effect

income tax compliance in india an empirical analysis abstract aggregate data are used to study determinants of income tax revenues and taxpayer compliance in india during 1965 1966 to 1992 1993 the estimates show that both revenues collected and compliance were significantly affected by tax structure marginal tax rates and exemption limit in addition inflation as well as declining assessment intensity had a significant negative effect while traditional enforcement tools searches penalties and prosecution activity had only a limited effect best practice enforcement assessment and tax structure policies could have yielded at most a 90 revenue increase leaving india s income tax performance below the average of countries with similar gdp per capita thorough reform of tax administration is therefore needed to raise income tax collection in india to international standards

tax me if you can ethnic geography democracy and the taxation of agriculture in africa it is typically assumed that african leaders enact policies that benefit their ethnoregional group using all types of patronage crop production and political power are geographically concentrated in many african countries and this paper exploits this overlap to cast doubt on this conventional wisdom it shows using data on 50 country crop combinations that cash crop farmers who are ethnically identified with the head of state face higher taxes furthermore democratic regimes impose lower taxes this paper shows that farmers who have few alternatives face higher taxes african leaders have used local intermediaries to exert control over the countryside and to ensure that farmers do not support alternative candidates it suggests that as leaders are better at selecting and monitoring these intermediaries in their home areas they can extract more from the majority at home than abroad using taxes on cash crops which are regionally but not individually targetable

miller s equilibrium shareholder leverage clienteles and optimal capital structure the purpose of this paper is twofold first we examine the individual portfolio decisions when income from stocks and bonds is taxed at different rates second a rationale for the existence of risky debt in the presence of leverage related costs and differential personal income taxation is provided previous studies on capital structure with differential personal income taxation have ignored either the portfolio risk consideration and or the possibility of losing personal and corporate interest tax shields due to insufficient taxable earnings e g 8 2 3 14 13 6 7 1 9 19 20 21 23 in section i of this paper both the portfolio risk consideration and the possibility of losing personal and corporate interest tax shields are explicitly introduced this enables us to provide a rationale for the shareholder leverage clientele phenomenon within a mean variance framework we also demonstrate a non corner solution for the optimal corporate capital structure in a tax environment similar to that of miller s debt and taxes 14 in sections ii and iii of this paper miller s world is further modified to include risky debt and the attendant costs we re examine and synthesize recent studies on the theory of optimal capital structure which have appeared since the publication of debt and taxes e g 4 6 7 13 19 20

the mercantilist index of trade policy we introduce an index of trade policy restrictiveness defined as the uniform tariff that maintains the same trade volume as a given tariff quota structure our index overcomes the problems of the trade weighted average tariff it avoids substitution bias correctly accounts for general equilibrium transfers and takes import volume instead of welfare as benchmark empirical applications to international cross section and time series comparisons of trade policy confirm our theoretical results trade weighted average tariffs generally underestimate the true height of tariffs as measured by the trade volume equivalent index this in turn always underestimates the welfare equivalent index

estimating border tax evasion in mozambique abstract the relationship between border tax rates and evasion is examined for mozambique using the methodology developed by fisman and wei 2004 we find that high tax rates are associated with high levels of under reporting of import values and that tax rates have a strong and positive effect on tax evasion results also strongly confirm the presence of fraudulent classification of merchandise into lower taxed product categories finally analysis of the revenue implications of lower trade taxes finds that the revenue curve is quite flat but remains upward sloping with respect to the tax rate when only evasion is considered

an equilibrium analysis of debt financing under costly tax arbitrage and agency problems in his recent paper merton miller 12 extends the notion of tax induced differential returns on securities into a general equilibrium framework in which firms make adjustments in the supply of corporate debt in an environment of progressive personal taxation the interest rates on taxable corporate bonds are greater than rates on tax exempt securities so as to compensate investors for the associated tax burden on the supply side value maximizing firms have an incentive to issue additional debt so long as the personal tax induced compensation is less than the tax savings from interest payment deductions at the corporate level miller argues that in the final equilibrium the interest rate differential between taxable and tax exempt bonds exactly reflects the tax advantage of debt financing at the corporate level thus the tax subsidy disappears in its entirety and we are back to an environment in which corporate leverage is inconsequential to the value of any particular firm what emerges in equilibrium is merely an optimal debt equity ratio for the corporate sector as a whole 1 miller derives this invariance proposition under the following assumptions 1 progressive personal tax rates reach a maximum at a level beyond the corporate tax rate 2 no tax arbitrage by individuals and firms is allowed 3 there is a personal tax rate differential in favor of income from stocks and 4 the opportunity for riskless borrowing and lending exists 2 indeed miller s equilibrium analysis is based on a zero effective personal tax rate on income from stocks but

the value of the tax subsidy on risky debt the effect of corporate taxes on the market value of a levered firm continues to be a central issue in recent contributions in finance theory e g miller 1977 deangelo and masulis 1980 kim 1982 modigliani 1982 in these and other studies e g krause and litzenberger 1973 scott 1976 brennan and schwartz 1978 kim 1978 the relationship between market value and capital structure is established by formulating a tax subsidy function that specifies the partial effect of debt on the expected tax savings at the corporate level under the existing u s tax code a working assumption in most of these studies is that both principal and interest are tax deductible this assumption is made in the spirit of the original modigliani and miller 1963 formulation in which debt is taken to be perpetual and riskless indeed it is well known that the tax shield provided by the deduction of principal in a singleperiod framework has the same value as the tax shield from interest deductions in the case of perpetual and riskless debt under this assumption it is shown that in the absence of non debtthis paper examines the relationship between leverage and the value of the firm when non debt related tax shields are available and the corporate tax is levied as an income tax in a previous paper de angelo and masulis argue that in the presence of nondebt related tax shields the relationship between debt and firm value is concave resulting in an interior optimal capital structure when there is a tax induced differential in the cost of corporate debt their result derives from the fact that they assume the payment of debt principal and non debt related depreciation charges are deductible however the former deduction is consistent with a wealth tax while the latter is consistent only with an income tax we show that if the interest alone is deductible the debt firm value function is convex resulting in corner solutions to the capital structure problem the authors wish to thank richard castanias richard green lemma senbet and especially an anonymous referee for helpful comments and richard green and robert dammon for computational assistance

taxation base in developing countries abstract informal sectors are larger in developing countries than in rich countries this is a result of higher fixed costs of entry into the formal economy in developing countries we show that raising barriers to entry is consistent with a deliberate government policy for raising tax revenue by generating market power and hence rents for the permitted entrants market entry fees foster the emergence of large taxpayers the rents can be readily confiscated by the government through entry fees and taxes on profits at a low administrative cost the relevance of the theory is assessed with a sample of 64 countries empirical analysis supports the results of the paper

the effect of taxes and depreciation on corporate investment and financial leverage this paper provides an analysis of the effect of corporate and personal taxes on the firm s optimal investment and financing decisions under uncertainty it extends the deangelo aad masulis capital structure model by endogenizing the firm s investment decision the authors results indicate that when investment is allowed to adjust optimally the existing predictions about the relationship between investment related and debt related tax shields must be modified in particular the authors show that increases in investment related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level in cross sectional analysis firms with higher investment related tax shields normalized by expected earnings need not have lower debt related tax shields normalized by expected earnings unless all firms utilize the same production technology differences in production technologies across firms may thus explain why the empirical results of recent cross sectional studies have not conformed to the predictions of deangelo and masulis

taxation portfolio choice and debt equity ratios a general equilibrium model this paper explores the portfolio behavior of investors differing with respect to both tax rates and risk aversion emphasizing the role of constraints on individual and firm behavior in ensuring the existence of and characterizing portfolio equilibrium under certain conditions on the securities available in the market which also are necessary for shareholders to be unanimous in supporting firm value maximization investors will be segmented by tax rate into two groups one specialized in equity and the other in debt though the relative wealths of the two groups determine the aggregate debt equity ratio each firm will be indifferent to its financial policy

regulation competition and liberalization in many countries throughout the world regulators are struggling to determine whether and how to introduce competition into regulated industries this essay examines the complexities involved in the liberalization process while stressing the importance of case specific analyses this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies

corporation tax finance and the cost of capital this paper examines the influence of corporate tax exhaustion on the firm s financial and investment decisions a dynamic programming model is used to establish effective marginal tax rates in the presence of a tax system that permits the carry forward of losses to future periods the paper demonstrates that internal optimal financial structures may result which do not require the imposition of external constraints the cost of capital is highly sensitive to the current taxable earnings of the firm and the implications of this for such tax transfer activities as leasing are discussed

a simple model of endogenous tax reform abstract this paper presents a model of optimal taxation that is useful for understanding governments incentives to switch from wage to consumption taxation the key ingredient is the fact that governments cannot precommit policy although under precommitment governments would tax only wages there is an ex post incentive to switch to the consumption tax as savings grow numerical examples for a nested ces utility function find that for reasonable parameter values equilibrium features a switch to consumption taxation in particular the model produces this tax reform when parameterized as in auerbach and kotlikoff s 1987 study

taxes capital structure and bondholder clienteles despite much recent progress financial theory has yet to explain the connection if any between the u s tax code and many observed characteristics of corporate bonds empirically why is there no single tax rate equating yields on corporate bonds with yields on tax exempt municipal bonds of apparently identical risks and maturities 2 specifically why does the spread in yields between corporate and municipal bonds divided by the yield on corporates a conventional measure of the marginal tax rate on corporates decrease with increasing risk and maturity more generally why are different types of bonds evidently held by clienteles of investors in tax clienteles for corporate bonds are identified in a competitive financial equilibrium under an asymmetric corporate income tax with interest preceding principal state contingent bonds with higher coupon yields are issued by firms with higher pretax cash inflows per dollar of nondebt tax shield purchased by investors in lower tax brackets and implicitly priced at lower marginal tax rates on these bonds all investors earn tax induced surpluses by contrast all other bonds have implicit tax rates typically equal to the corporate rate and yield for many investors no tax induced surpluses we gratefully acknowledge the helpful comments of george constantinides kose john merton miller jim scott marti subrahmanyam and participants in seminars at baruch chicago columbia houston michigan nyu rutgers usc washington wharton the american finance association the western finance association and the johnson symposium on taxes and finance at wisconsin george constantinides was especially helpful 1 the most notable contribution is miller 1977 other recent papers include chen and kim 1979 kim lewellen and mcconnell 1979 deangelo and masulis 1980a 1980b taggart 1980 kim 1982 auerbach and king 1983 and talmor haugen and bornea 1985 black 1971 anticipates an equilibrium with clienteles 2 schaefer 1982a identifies tax induced clienteles of bondholders in the british gilt market van horne 1982 reports that implicit tax rates vary over time as the supply of discount bonds changes additional evidence is cited in trczinka 1982

corporate risk management integrating liquidity hedging and operating policies we analyze the value created by a dynamic integrated risk management strategy involving liquidity management derivatives hedging and operating flexibility in the presence of several frictions we show that liquidity serves a critical and distinct role in risk management justifying high levels of cash we find that the marginal value associated with derivatives hedging is likely to be low though we explain why some empirical studies find a higher value we explore the complex interactions between operating flexibility and financial risk management finding that substitution effects are nonmonotonic and are affected by operating leverage the nature of operating flexibility and the effectiveness of the hedging instrument this paper was accepted by jerome detemple finance

halving global poverty the goal of central importance to this paper is to cut in half the proportion of people living below 1 a day from around 30 percent of the developing world s population in 1990 to 15 percent by 2015 based on population projections in 1990 this would correspond to around one billion people exiting poverty this paper begins by discussing poverty trends on a global scale where the poor are located in the world and how their numbers have been changing over time it then discusses the relationship of economic growth and income distribution to poverty reduction finally it suggests an evidence based agenda for poverty reduction in the developing world full text available at official url

taxation corporate financial policy and the cost of capital the cost of capital plays an important role in the allocation of resources among competing uses in a decentralized market system the purpose of this paper is to organize and present what is known and what is hypothesized about the effects of taxation on the incentive to invest via the cost of capital taking full account of important issues that arise independently from the question of taxation included in the analysis is a discussion of empirical findings about the interaction of inflation and taxation in influencing the incentive to invest and a treatment of taxation and uncertainty this abstract was borrowed from another version of this item

taxation wage controls and the informal sector abstract in this paper we study the effects of taxation and wage controls in a developing economy with an informal sector for that purpose we build a model with firm heterogeneity in which a formal and an informal sector endogenously emerge in some productive branches of the economy based on the assumption that the marginal cost of tax and regulation evasion increases with the size of the firm our model offers an explanation for the observed discontinuity in the distribution of firms size the missing middle three forms of dualism scale wage and evasion consistent with market segmentation are obtained the model accounts for the presence of waiting unemployment that seems particularly pervasive in urban regions a computable general equilibrium cge model for cameroon is built incorporating these features various reforms of the tax and regulation system are simulated and their effects on the extent of the informal sector are analyzed

public goods hidden income and tax evasion some nonstandard results from the warm glow model abstract a large literature explores crowd out in situations where public goods are jointly provided work in this area typically depicts a tax system where individuals take taxes as given but in some settings such as those in developing economies efforts to evade or avoid taxes may be widespread using the canonical warm glow model this paper considers joint public good provision in a setting where individuals can evade taxes by hiding their income the model s implications change significantly in this setting with hidden income stronger warm glow will lead to greater crowd out not less using research on crowd out and inter family transfers i present suggestive evidence that the model s results may help to reconcile divergent estimates of crowd out in the literature

trade openness and economic growth a cross country empirical investigation abstract this paper demonstrates that trade liberalization does not have a simple and straightforward relationship with growth using a large number of openness measures for a cross section of countries over the last three decades we use two groups of trade openness measures the regression results for numerous trade intensity ratios are mostly consistent with the existing literature however contrary to the conventional view on the growth effects of trade barriers our estimation results show that trade barriers are positively and in most specifications significantly associated with growth especially for developing countries and they are consistent with the findings of theoretical growth and development literature

valuation and hedging of risky lease payments presented here is a simple formula to value risky corporate lease payments when the amount of debt displaced by a lease depends on the value of the lease the displaced debt tax shields are risky the value of these risky tax shields is less than the value of riskless tax shields the valuation of the lease makes use of a dynamic investment strategy that replicates the lease payments and associated tax shields from displaced debt a useful variation of the valuation formula requires only the contractual cash flows and the yield on lease equivalent debt calculations show that the new formula can produce significantly different lease values from formulas that assume riskless cash flows

tax morale in latin america in the tax compliance literature there is a lack of empirical evidence on the degree of tax morale in developing countries as a novelty this paper focuses thus on latin america analysing tax morale as a dependent variable and searching for factors that systematically affect tax morale working with the two data sets latinobarometro and world values survey our findings indicate that there is a significant correlation between tax morale and the size of shadow economy furthermore people who said they knew have heard about practised tax avoidance have a significantly lower tax morale than others looking at individuals perception of reasons for tax evasion we found that the tax burden lacking honesty and corruption are seen as the main factors we observed a significantly lower tax morale in south america mexico than in the central american caribbean area furthermore trust in the president and the officials the belief that other individuals obey the law and a pro democratic attitude have a significant positive effect on tax morale

the design of fiscal reforms in revenue constrained developing countries while generalisation is perilous there are many especially small developing countries for which sales taxes and turnover taxes are fairly negligible as revenue sources and for which import duties and export taxes particularly the former are leading revenue sources for evidence from the early i980s see tanzi i987 and greenaway and milner i990 this observation is unsurprising when account is taken of the administrative constraints to which many developing countries are subject sales taxes can be difficult to collect not to mention a complex tax like vat income tax is largely infeasible and often has to take a simple form such as a payroll tax confined in practice to public and large company employment some taxes which would be assumed to be eminently feasible in industrial economies may not generate as much revenue as might be supposed in a developing country for instance tax disks which the law may require heavy goods vehicles to carry may generate a flow of bribes to police and other officials if these are wise enough to set the bribe at a modest level making it cheaper to pay bribes than to buy a disk a cynic might say that the bribes are an unofficial source of revenue if their existence enables the state to get away with paying its officials absurdly low salaries one would have to hope if that argument is accepted that the officials do something socially useful apart from stopping heavy goods vehicles such considerations make it interesting to consider the design of public finance for a country severely constrained in its choice of what musgrave called tax handles that is types of tax instrument which it may practically employ the existing literature for which newbery and stern i987 provides an excellent review throws some light on this issue but the problem is seldom treated explicitly an exception would be dreze and stern i985 whose highly abstract and general treatment of cost benefit analysis theory can be seen to incorporate principles of public finance which fully cover the restricted policy choices which i have in mind because the approach of these authors is so general however it is not easy to extract conclusions for tax design in specific cases this is no criticism of the paper of course as the argument is addressed to cost benefit analysis generally speaking theory has developed in the direction of sophisticated and complex tax systems the next section discusses why this is so from the point of view of theory yet ideal tax systems would be difficult to implement in many developing countries as i shall treat tariffs as a highly feasible revenue

tariff rates tariff revenue and tariff reform some new facts this article compares the statutory and valorem tariff rates official rates with the ratio of tariff revenues to import values collected rates for jamaica kenya and pakistan it identifies four general features of the tariff codes considers whether these features apply to all developing countries and discusses four implications of these features for tariff reform first the collected rate for any given item in the tariff code is only weakly related to the official rate for the item second the variation of collected rates on average increase much less than the official rates fourth the relation between official rates and collected rates is nonlinear because the slope is lower at higher levels of the official rate

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

agricultural pricing and public investment abstract aggregate agricultural supply is price inelastic but responsive to investment in agricultural infrastructure irrigation roads research extension thus the government should tax agriculture and finance infrastructure although unlikely to pay for itself directly it will increase taxable agricultural surplus but by raising rural living standards and therefore the supply price of urban labour it reduces urban tax revenue its marginal social product is therefore overstated when measured at world prices though understated at distorted agricultural prices with scale economies in industry the case for taxing and investing in agriculture is strengthened it may allow the economy to escape stagnation

trade liberalisation and poverty reduction in vietnam this paper investigates the impacts of trade liberalisation on poverty reduction in vietnam during the period of economic reform using a combined approach dealing with four transmitting channels from trade to poverty the major findings are summarised as follows first vietnam s trade liberalisation has fostered economic growth which has helped to raise per capita gdp and reduce poverty second trade liberalisation has directly benefited the poor through creating pro poor employment and raising wages third another impact of trade liberalisation on poverty is income and substitution effects associated with reduced domestic prices of importables and increased domestic prices of exportables such as coffee and rice fourth trade liberalisation has indirectly benefited the poor because it raises government revenue which enhances the government s ability to subsidise the poor finally although the poverty rate in vietnam has been reduced impressively there is an increasing disparity between urban and rural areas and among the latter concern does exist regarding ethnic minorities

on tax efforts and colonial heritage in africa abstract one commonly observed phenomena about taxation in africa are regional differences and the fact that southern african countries have higher levels of shares of taxation in gdp this article argues that the major source of differences in tax effort is the colonial histories of various countries using standard measures of tax effort in a panel data framework and dividing colonial africa along forms of incorporation into the colonial system it shows that african countries and others with similar colonial histories have higher levels of tax effort however the difference disappears when we control for the colonial factor these results hold under different model specifications

reformulating tax shield valuation a note standard financial theory in the absence of agency costs and personal taxes implies that each dollar of debt contributes to the value of the firm in proportion to the firm s tax rate to derive this result incremental debt is assumed permanent this paper shows that when the firm acts to maintain a constant market value leverage ratio the marginal value of debt financing is much lower than the corporate tax rate since hamada s 2 unlevering procedure for observed equity betas was derived under the assumption of permanent debt we derive an unlevering procedure consistent with the assumption of a constant leverage ratio implicit in the modigliani miller 4 hypothesis regarding the effect of leverage changes on firm value is that the firm maintains a constant level of debt the purpose of this paper is to examine the implications for tax shield valuation of maintaining a constant market value leverage ratio instead of a constant debt level assuming a constant leverage ratio instead of a constant debt level does not imply any change in the normative implications of capital structure theory however we show that when the firm s financing strategy is to maintain a constant market value leverage ratio the marginal value of a change in debt level resulting from a change in this leverage ratio is much lower than the corporate tax rate we also derive the relationship between the firm s equity beta and its unlevered beta under the assumption of a constant leverage ratio

taxes and bribery the role of wage incentives this paper presents a simple model to evaluate alternative payment schemes for tax inspectors in the presence of corruption we consider problems of both moral hazard which arises because taking bribes cannot be observed without costly monitoring and adverse selection since not all potential tax inspectors can be identified as being honest or dishonest we identify three wage regimes first one could pay the same wage that a tax inspector could earn elsewhere his reservation wage second one could pay a wage which solves the moral hazard problem i e deters bribery this we call an efficiency wage by analogy with recent models examined i n macro economics third the government could pay a wage below the reservation wage at which only the dishonest become tax inspectors the capitulation wage we make precise the conditions under which each yields the greatest amount o f tax revenues net o f administrative costs many countries in the developing world are undergoing structural adjustment programmes which require fundamental fiscal changes outside agencies advise restoration of budget balance a task which involves expenditure cuts and tax increases the treatment of public employee pay scales often poses a particular dilemma i n this process wages and salaries are a significant component of government expenditures and one important question concerns the extent to which wages rather than employment cuts should be used to save money there is sometimes a reluctance to advocate wage cuts stemming in part from a feeling that this might impair the performance of the public sector hence tanzi 1990 argues that a policy of wage cutting is likely to increase the inefficiency of public sector employees especially at a time when the public sector is expected to play a larger role in restructuring the economy p 16 in the context of tax collection the issue is particularly pressing given the need to raise more tax revenues a reduction in efficiency in this branch of the government i s likely t o mean that fewer returns are processed and when individuals living standards are squeezed their incentive to accept bribes in lieu o f collecting taxes i s increased o n this count i t i s even sometimes suggested that wages of tax inspectors should be increased to aid the effort to the comments of henry bienen john hey and two anonymous referees have been helpful in revising this paper the authors are also grateful t o the john m olin program for the study o f economic organization and public policy at princeton university and the pew charitable trusts for financial support mclaren also acknowledges support from the international finance section of princeton university none of the above should be implicated in any way see for example goode 1984 chapter 1 3 and gould and amaro reyes 1983

why poor countries rely mostly on redistribution in kind abstract we present a model in which the crucial distinction between rich and poor countries is that governments in rich countries have access to a more productive tax collection technology than governments in poor countries since the tax collection technology in poor countries is poor the quality of the public service is low therefore many households at the top of the income distribution opt out of the public service the median voter takes this into consideration and allocates a larger share of the public budget to redistribution in kind public service than to redistribution in cash

agricultural taxation in developing countries a survey of issues and policy this study surveys the experience of agricultural taxation in developing countries in the context of the ongoing policy debate about the tax structure and administration affecting agricultural producers using the examples of a number of countries it analyzes the conceptual and practical problems associated with different tax regimes governments in most countries have reduced indirect export taxes on agricultural producers however the revenue from direct taxes on farmers has not increased a major problem in most countries has been the measurement of actual agricultural income different measures for presumed income have been used with varying success they seem to have the most potential for increased revenue in many countries but their effective implementation is constrained by the political and administrative considerations

integrity for hire an analysis of a widespread customs reform abstract can governments improve bureaucratic performance by hiring integrity from the private sector in the past 2 decades a number of developing countries have hired private firms to conduct preshipment inspections of imports generating independent data on the value and tariff classification of incoming shipments i find that countries implementing such inspection programs subsequently experience large increases in import duty collections by contrast the growth rate of other tax revenues does not change appreciably additional evidence suggests that declines in falsification of import documentation are behind the import duty improvements the programs also lead to declines in undervaluation and misreporting of goods classifications historically this hired integrity appears to have been cost effective with improvements in import duty collections in the first 5 years of a typical inspection program amounting to 2 6 times the program s costs

east asian economic performance miracle or just a pleasant surprise p ublication of the east asian miracle eam world bank 1993 appears to borrow a phrase to have generated more heat than light the eam analysed reasons for the economic success of the eight high performing asian economies hpaes hong kong indonesia japan malaysia republic of korea singapore taiwan and thailand the hope at least of neutral observers was that we would be able to derive lessons regarding effective economic policies from a study of the experiences of the successful east asian economies the general criticism of the report is that it tried to mould the hpaes experiences so that the lessons were consistent with bank policy in the process losing many distinguishing features of the eam more serious criticisms are that the report obfuscated and distorted the truth it is not our intention to reopen debate about the report fully aired in a special issue of world development april 1994 and rodrik 1994 we do wish to address three questions what were the distinguishing features of the east asian economic success that led some observers to claim a miracle what elements of economic policy contributed to their success and are such elements present in the economic policies proposed by the bank in for example adjustment programmes are there features of the hpaes that can be adapted to help design successful policies for other countries put succinctly what did they do that appears so good how did they do it and can others do it writing in 1998 it may appear irrelevant to talk of an east asian miracle as so many of the economies we consider have recently endured currency crises of varying degrees of severity current problems should not detract from the sustained and generally impressive growth achieved by these economies over the

mutual supervision in preshipment inspection programs abstract preshipment inspection psi programmes are implemented in many developing countries to assist governments in the collection of revenue at their borders these programs consist of the delegation of the inspection of imports to a private firm to study these psi programmes we develop a hierarchical agency model in which the government authority can rely on two supervisors namely the private inspection firm and the customs administration to control importers declarations the government s optimal contract is fully characterized we devote some attention to the inspection policy and its comparative statics properties in particular we identify the situations in which psi programmes are revenue enhancing we also discuss the reconciliation policy i e what to do in case of conflicting inspection reports by the inspection firm and the customs administration in the optimal mechanism mutual supervision between the inspection firm and the customs administration is used to provide adequate incentives to all parties