Category Archives: Income tax

28/1/2020: Federal Tax Revenues Over Time


Via the @SoberLook, WSJ's data / charts newsletter, a neat summary of changes in the U.S. federal taxation base over the years:


What does it tell us? In the 1940s-1960s, the share of excise, inheritance and other taxes, plus the share of corporation taxes in total federal tax revenues ranged above 30 percent, declining from around 45 percent in the 1940s to roughly 35-36 percent in the 1960s. Over the last decade, that share was around 14-15 percent. The burden of taxation, instead, has dramatically shifted onto labor income and personal income. This trend is forecast to worsen over the 2020s decade, with non-income taxes expecting to decline in their importance to around 12-13 percent of the total tax revenues.

It is worth noting that the benefits distribution has been also trending against current income earners, with a rising share of Government spending accruing to old-age support programs, social security payments and, of course, as usual - Pentagon.

Given these trends, it is hard to see how the politics of the younger electorate (growing role of the Millennials, GenXers and GenZers in voting) is going to be compatible with this situation. Likewise, given the likelihood for future shift in electoral politics against low corporation tax revenues share in total tax take in the U.S., it is hard to see how continued prosperity of the well-known corporate tax havens, including Ireland, Luxembourg, the Netherlands et al, can be sustained either.

11/1/19: Capital Gains Tax: Human Capital vs Other Forms of Capital


This is exactly the source of policy-induced wealth inequality in the modern advanced economies: the disparity between labor income tax and capital gains tax that (1) incentivises accumulation of capital gains generating assets; (2) increases wealth inequality arising from non-meritocratic transfers (spousal and inheritance); and (3) reduces gains from meritocratic investment in human capital.


Now, factor this into tax-adjusted returns on various forms of capital: Intangible Capital returns are taxed at a corporate tax level at below the Physical Capital returns tax rates, which fall lower than the Capital Gains tax rate. Meanwhile, returns to the [intangible] Human Capital are taxed at the rates of higher margin Income tax rates. Go figure why wealth inequality is rising (as entrepreneurship is shrinking).

11/1/19: Capital Gains Tax: Human Capital vs Other Forms of Capital


This is exactly the source of policy-induced wealth inequality in the modern advanced economies: the disparity between labor income tax and capital gains tax that (1) incentivises accumulation of capital gains generating assets; (2) increases wealth inequality arising from non-meritocratic transfers (spousal and inheritance); and (3) reduces gains from meritocratic investment in human capital.


Now, factor this into tax-adjusted returns on various forms of capital: Intangible Capital returns are taxed at a corporate tax level at below the Physical Capital returns tax rates, which fall lower than the Capital Gains tax rate. Meanwhile, returns to the [intangible] Human Capital are taxed at the rates of higher margin Income tax rates. Go figure why wealth inequality is rising (as entrepreneurship is shrinking).

14/3/2016: Inheritance-Rich Social Disasters?


Using microdata from the Household Finance and Consumption Survey (HFCS), a recent research paper from the ECB examined “the role of inheritance, income and welfare state policies in explaining differences in household net wealth within and between euro area countries.”

Top of the line findings:

1) “About one third of the households in the 13 European countries we study report having received an inheritance, and these households have considerably higher net wealth than those which did not inherit.” Which is sort of material: in a democracy 1/3 of voters making their decisions based on inherited wealth can and (I would argue) does impose a cost on those who do not stand (do not expect) to inherit wealth. Examples of such mis-allocations? Take Ireland, where everything - from retirement to housing markets to childcare provision to education hours is predicated on transfers of income and / or wealth within the family. While those who stand to gain through this system cope well, those who stand to not gain through this familial wealth and income transfers system, stand to lose. Guess who the latter are? Of course: the poor (or those from the poor background, even if they are higher earners today) and the foreign-born.

2) “Regression analyses on households' relative wealth position show that, on average, having received an inheritance lifts a household by about 14 net wealth percentiles. At the same time, each additional percentile in the income distribution is associated with about 0.4 net wealth percentiles. These results are consistent across countries.” Which, in basic terms means that you have to work 2.5 times harder to achieve the same impact as inheritance for every point increase in inherited wealth. Merit, you say? Of course not: daddy’s money vastly outperforms, as far as financial returns go, own education, effort, aptitude etc… Though, of course, here’s a pesky bit: for all those pursuing equality and other nice social objectives, higher income taxes, of course, make it even less feasible for income (work) to catch up with inherited wealth. Which might explain why well-heeled (and often inept) folks of Dublin South are so much in favour of the ideas of raising income taxes, but are not exactly enthused about hiking inheritance taxes.

3) “Multilevel cross-country regressions show that the degree of welfare state spending across countries is negatively correlated with household net wealth.” Which, basically, says the utterly unsurprising: wealthy households don’t rely on social welfare. Doh, you’d say. But not quite. The “findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries. In particular, the effect of substitution relative to net wealth decreases with growing wealth levels. This implies that an increase in welfare state spending goes along with an increase -- rather than a decrease -- of observed wealth inequality.”

In other words, inheritance induces higher inequality in wealth. It compounds this effect by allocating inheritance without any sense of merit and at an indirect (policy) cost to those households that are not standing to inherit wealth. Which means that more inheritance-based is the given society, more wealth inequality you will get in it, and less merit in wealth allocation will result. Which, in turn implies you gonna pay for this with higher taxes (everyone will, except, of course, the really wealthy).

Next time you driving through, say Monkstown, check them out: the *daddy’s money* wandering around… they cost you, in tax, in higher charges for policy-related services, and in merit-less society.


Full paper here: Fessler, Pirmin and Schuerz, Martin, Private Wealth Across European Countries: The Role of Income, Inheritance and the Welfare State (September 22, 2015). ECB Working Paper No. 1847: http://ssrn.com/abstract=2664150

25/1/16: Nordic Model: Not Too Heavy Handed on Corporate Profits


Much of the tax debate nowadays has been around tax base erosion and corporate taxes. But the old issue of what to tax: capital or profits is still unresolved. One interesting myth, associated with this debate, is that Nordic countries run a more ‘balanced’ tax system that relies on corporate profit taxes and avoids the problem of so-called harmful tax competition commonly attributed to Anglo-Saxon models where, again allegedly, corporations are treated softly with low tax rates and more benign tax regimes.

Well, a myth is a myth. And a recent paper, titled “Taxing Mobile Capital and Profits: The Nordic Welfare States” by Guttorm Schjelderup (CESIFO WORKING PAPER NO. 5603 NOVEMBER 2015) goes in depth to dispel it.

Per author: “The Nordic countries have traditionally been characterized by an extensive welfare state, a homogenous population and labour force, and redistributive taxation. This has changed in recent years.

First point of interest is WHY has it changed. Author attributes the change to

  • Increased immigration, 
  • Ageing population, and 
  • “Competition for capital among countries”

These factors “…have put pressures on public finances and the welfare state. These changes can be attributed to the globalization process whereby national economies become more integrated. Economic integration takes place in terms of increasing factor mobility, in particular mobility of capital, and rising volumes of trade in goods and services.”

Now, we have our first lesson: if you run a globally-integrated economy, while you have a modern (aka post-baby boom society) you will see these three factors at play in your economy too. No one’s immune.

“An argument frequently used by political lobby groups is that with free capital mobility corporations shouldn't be taxed at all and that taxing investment income is actually bad for workers. The argument is that if you cut taxes on investment income, more investment is encouraged. More investment means people have more equipment and technology to work with, which should increase the productivity of labour and thus wages and economic growth. Put differently, a tax on mobile capital would lead to an outflow of capital that would cause wages to fall; effectively shifting the full burden of the tax on capital onto workers. It is then better to tax workers directly and levy a zero tax on capital.”

Ok, we’ve heard this before. But is it making any sense?

Per author: “The argument above relies on strong assumptions, among them that labour is immobile and cannot evade taxation, that there are no country specific rents, and that domestic firms are not owned in part by foreigners.” However,

  • “If domestic firms, say, are partly owned by foreigners, taxing capital would imply that some of the tax burden is shifted onto foreigners and that part of the welfare state is then financed by foreigners. This alone may warrant a positive tax on investment capital.”
  • “If industrial agglomeration is concentrated in one single country, a government may, through a positive source tax on capital, be able to exploit the locational rent created by agglomeration forces and thus increase welfare.”


More importantly, “the zero tax on capital result is also difficult to confirm empirically. Yagan (2014), for example, …finds that it caused zero change in corporate investment in U.S. unlisted firms and that it had no impact on employee compensation. It did, however, have an immediate impact on financial pay-outs to shareholders. Alstadsæter et al. (2015)… find that the Swedish 2006 dividend tax cut did not affect aggregate investment but that it affected the allocation of corporate investment. In particular, …relative to cash-rich firms, cash-constrained firms increased their investments after the dividend tax cut.”

Key, however, is that corporate tax acts as “…a “backstop” to the personal income tax. If a country abolished the corporate tax rate, wealthy individuals in particular would be given an incentive to reclassify their labour earnings as corporate income, typically using offshore corporate structures and escape tax. The corporate tax might also be needed to avoid excessive income shifting between labour income and capital income. Finally, the corporate tax also acts as a withholding tax on equity income earned by non-resident shareholders, who might otherwise escape taxation in the source country.”

Now onto evidence regarding evolution of tax regimes. 

“Countries throughout the world have reduced their corporate taxes in an effort to attract or retain corporate investments. The Nordic countries have pioneered what is commonly known as the dual income tax (DIT). It combines a flat tax rate on capital income with progressive taxation of labour income. One of the arguments in favor of the DIT is that it allows policy makers to lower the corporate tax rate to reduce the risk of capital flight, whilst at the same time tax distributed dividends to personal shareholders.”

But there are “challenges of taxing capital for small open economies. Although the corporate tax share of GDP in most countries is only around 3-4%, it is an important tax because it acts as a “backstop” for the personal tax rate. …The pressures of tax competition are exacerbated by tax planning and income shifting to low tax countries by multinationals. Studies show that multinationals pay less tax than domestic firms and this may give them a competitive edge over domestic firms. The long term effects may be changes in ownership structure that affect competition in markets and make the corporate tax base more tax sensitive. Profit shifting is undertaken through transfer pricing and thin capitalization (excessive debt).” Care to spot Irish trends here? Why, they are pretty obvious.

But back to the Nordics vs Anglo-Saxons arguments. Per paper, “It is interesting to note that the Nordic countries seem to have gone further in terms of abolishing redistributive capital taxes than countries traditionally associated with polices much less tuned to redistribution. Aaberge and Atkinson (2010) shown how income inequality at the top of the distribution has increased in Anglo-Saxon countries, whereas the same rise in top income shares was not experienced by Continental European countries. They find that the Norwegian and Swedish experience over the twentieth century is similar to the Anglo-Saxon countries in that top shares, and the concentration among top incomes have first fallen and then risen. Norway differs from Sweden in that that the top shares rose more sharply in the period 1990-2006. Between 1980 and 2004, for example, the share of the top 1 per cent more than doubled in Norway, but rose less than half in Sweden.”



What are the reasons for these trends?

“Several explanations have been put forward to explain why Norway sets itself apart. The implementation of the 1992 tax reform abolished the dividend tax and lead to a sharp increase in dividends and capital gains among the richest in Norway. Capital taxation in Sweden was less favourable. Substantial oil production in Norway started some 15 years before the rise in inequality, but could still be an explanatory factor due to constrained cash in this sector in the initial phase of production. Capital market reforms with liberalization of interest rates and an upturn in business cycles are also important factors that are hard to disentangle, but they certainly played a role.”

Social impact of tax-linked inequality? “Capital taxation also affects income mobility, and concerns about rising inequality have often been countered by constant changes in the composition of top income earners. If so, the rise in top incomes may not translate into “economic power”. Aaberge et al. (2013) study who enters and leaves the top income groups in Norway in the period 1967-2011. Their main conclusion is that despite large changes in top income mobility over the last four decades, the magnitude of the effect of the changes in mobility on the income shares was moderate.”

What’s the future holds? “Competition among countries to attract mobile capital is a persistent phenomenon and will be a driver towards still lower taxes on mobile capital. A major change from the past, then, is less ability to redistribute, increasing income inequality, and rising immigration from poor countries. In sum these forces may affect trust between members of society. The level of trust is positively linked to economic growth. Herein lies a major challenge for the Nordic welfare states.”

And as an aside, here’s the actual draw on Nordic v Anglo-Saxon patterns in taxation: “In 2004, the classical welfare states in Scandinavia and continental Europe had lower ratios of statutory corporate to wage taxes than the Anglo-Saxon countries (except Ireland). In 2004, the corporate tax rate was only 63% of the wage tax rate for an average worker in Sweden, but 171% of the wage tax rate in the United States. Such differences are in striking contrast to the common perception that social democratic governments (as in Scandinavia and continental Europe) share a higher preference for redistribution, as compared to more conservative and free market oriented types of governments.”

Oops… who’s the neoliberal b*&ch now?..