Topic 9: Tax Efficiency Flashcards
What is the welfare impact of hypothetical lump sum transfers?
They cause no dead weight loss, as per the second fundemental theorum of welfare economics.
What causes inefficiencies in taxation?
In general, what affects the magnitude of this DWL?
Taxes disincentive a set of activities, and themselves have an administrative cost.
The more elastic the response to the tax (or more generally, to the price the tax is adding to) the larger the inefficiency will be.
How efficient taxes on labour income?
Depends on elasticitiy of labour supply, which is likely to be very inelastic. This makes the tax rellatively efficient. Estimates of the dead weight loss range from zero-30% of the tax revenue collected.
But a system that relies on one efficient tax is inequitable.
How efficient are taxes on capital income?
Depends on the elasticities of supply, which is complex due to the nature of the financial market.
In the bretton woods era financial flows across borders were banned, so supply was pretty inelastic, so capital taxes were pretty efficient. But there are many ways to escape taxation -ex. owning a firm that itself own capital. The firm need not pay dividends but instead reinvest. Then defer liquidation of capital gains until retirement where marginal tax rates are low.
But since capital is pretty mobile now governments have to compete to attract capital. This means dead weight losses from capital taxes are relatively larger.
Analysis the efficiency of trade taxation through partial equailibrium modelling.
Capital owners gain there area acek
Consumers looses the area adhk.
The Government gains revenue cdgh/cdfg.
The deadweight loss is cef and dgh.
Not ‘efficient’ but is actually less inefficient then other measures of taxation.
How efficient are taxes on wealth, such as land or deceased estates?
These can be very efficient, provided the wealthy can’t retreat to forms of indirect ownership, such as trusts or companies formed in tax havens.
Wealth taxation is strongly resisted by influential groups for obvious reasons.
States.Nations compete to attract investment by the wealth so there cna be a ‘race to the botton’ as each competitively reduces it’s tax rates.
Does Australia tax decreased estates? Why not?
Until 1980, the states did. But then Queensland stopped doing so to attract retirees. All other states then had to follow.
What experiences has Australia had with Resource Rent Taxation?
First implemented in off sure petroleum production, which avoided state taxation. Pretty succesful.
Subsequent attempt on mining companies in the 21st century has been pretty dismal.
What has been some problems with the Mineral Resources Rent Tax (MRRT) introduced by the Gillard Government?
- Iron ore and coal are amongst the worlds most abundant minerals
- Mining companies anticipated chinese growth and made immsense investments in mining infrastructure, it is uncertain whether the ‘high’ rents accrued are on the resource itself or on the capital established in advance.
What is a Brown Tax?
A tax where the government effectively becomes an equity invester by covering losses and taxing profits. We can see that if the government taxes by:
For losses, tax office covers 40% of loss
For profits, 40% is taken as tax.
A company that digs a mine for $100 in one year ($100 loss) then sells output in the next year for a pro tax profit of $120, a reasonably large interest rate would be 10%, so there is an extra 10% super profits.
This company would then recieve $40 in the first year and pay $48 (40% of $120) in the second.
The governments $40 payment reduces the required investment of owners. The return rate to investors is unchanged.
What are the merits & criticisms of resources rent tax, with regard to it’s being Brown tax?
The advantage is that it leaves incentives unchagned; however this is dependent on
- Having the government as a silent partner has no effect on business incentives
This is not the case, as every dollar of management invested now yields a smaller absolute return to the owners of private equity. This means Brown taxes can lead to slack management and slow productivity growth.
- It must apply from the outset of projects
The tax proposed in the Henry review would have immediate effects on existing projects. If only book costs, unadjusted for inflation are used, then the government will not bear its share of losses. Moreover, the existing projects are the lucky survivers, with others being terminated and written down.
- The goevrnment contributes when cash losses are incurred - the proposed tax allows losses to be carried forward at the bond rate. But the government is constantly tinkering with tax rules, and the bond rate understates the cost to investors of deffered payment.
Brown taxes are a good idea if they replace royalties (a tax on each unit) as these are very distorting.
But in the proposal royalties paid to the states are credited against the amount owed to the commonwealth. This creates an increntive for states to increase royalties (SA has already indicated it may).
Why was the resource rent tax concieved?
Under pressure to reduce the corporate tax rate. The mining industry lobbied to replace royalties with a profits tax.
Because royalties is state based, this exacibated the two speed economy problem.
What are some additional problems with the RRT concept?
- If the government is to be a net gainer, the tax must impair the expected average rate of return on mining investments.
- In practise, commodity prices do not have negative serial correlation, which means. The periods of low return are long, interspersed with short booms with high returns - mining companies depend on these booms for long run profitability.
- Governments can’t credibly commit to offset losses for long period, politically unpopular to hand money to corporations.
- There may not even be rents to tax - for petroleum & natural gas teh price is always way higher then cost, not necessarily so for iron ore.
- Large capital investment required for mining is onyl justified with prospect of high return booms.
What is the merit of the status quo visa vi mining taxes in Australia
Company tax is the same across all industries in the federation\
Royalties may be efficient
- Levied in proportion to activity on public land and so compensate the public proportionally for despoilation.
- Although rates vary, always emboedied in public acts of state parliament, so very transperant.
- Mining companies have a vested interest in profit based taxes, but that doesn’t mean we should do that.
Give the four formal critiques of the RSPT and MRRT by Ergas et al.
Ergas et al
- The choice between royalties and profit based taxation involves an efficiency trade-off between diminished incentives to produce and diminished incentives to minimise costs. The Brown tax is a tax, one that reduces the incentive to mine.
- Second, teh Resource Super Profits Tax (RSPT) falls on quasi-rents as well as on rents, so involves some expropriation.
- The succesor to the RSPT, the miniral resource rent tax (MRRT) has many of the RSPT inefficiencies but ads some further inefficiencies of its own.
- The value of revenues from taxes are usually overstated, as the revenues are very risky, and may lead to unwise spending commitements.
