Week 5 Flashcards
What model did Domar and Mugrave build and what did it show?
They built a mode to show how taxation influences risk taking.
ingredients: one asset with no return, one asset with risky return. Government taxes positive returns and allows deductions for negative returns.
The idea is that taxation increases risk taking because any tax can be undone through higher investments.
What is a capital gains tax (taxation on realization) ? how does it differ from a taxation on accrual?
In practice investments are taxed in the form of a capital gain, i.e. the difference between the purchase and the sales price.
Taxation on accrual - taxes are paid in each period on the return earned in this period (e.g. bank accounts, government bonds)
this is different form taxation on realization also known as capital gains tax.
Why is the capital gains tax burden lower than with taxation on accrual?
- Accrual may be hard to measure for some assets (e.g. paintings)
- For volatile assets, there may be liquidity constraints (may lead to inefficiencies)
What are the income allocation boxes in the Netherlands?
Box 1 - employment related income
Box 2 - ownership of limited liability companies
Box 3 - saving and investment
Why should we reduce capital gains taxes?
- It protects against inflation
but, inflation is a problem for other forms of saving/ income too - improved efficiency of capital transactions as people try do delay sale until the discounted value is lower
but, asset markets depend on fluidity to achieve optimal allocation - encourages entrepreneurial activity
but, no evidence that this is the effect on risk taking
What did Burman and Randolph (1994) study and what did they find?
They used panel data to estimate capital gains tax rates to estimate the effect on capital gains relization.
Result - Virtually all of the response is transitory -> individuals just speed up sales they had planned anyway.
What are gift and estate tax?
Gift tax - give an individual a gift worth more than 2,147 euros is taxed
Estate tax - Pass remaining assets on to your heirs upon your death
Both are taxes at a rates between 10% and 40%
what are some pro estate tax arguments?
- Because of high tax exemptions, tax is extremely progressive
- Avoids concentration of wealthy dynasties
- Keeps incentives for heirs to work hard
What are some anti estate tax argument?
- Taxing a grieving family is cruel (e.g. “death tax”)
- Since income is taxed, estate tax leads to double taxation (distorts efficiency?)
- Sophisticated taxpayers can avoid tax (e.g., through trust funds)
What is a property tax? What is the incidence of property tax?
Property tax is the tax levied on the value of real estate, including the value of land and any structures built on the land.
1) the capital tax view - levying taxes will chase capital out of town to other jurisdictions
2) the benefits of tax view - there is no burden to anyone because owners receive local public goods in exchange
3) traditional view - tax is levied on two factors, land (inelastic) and buildings (elastic) buildings part may be borne by community.
What did Surico and Trezzi (2019) study?
They used the italian property tax reform in 2011 (increase in tax base by factor of1.6) to check consumption patterns of homeowners.
The used a DiD: - compare those who are subject to tax with
those who are not
- Before and after the introduction of the tax
The found a positive effect on consumption rates after the tax reform.
