Income Taxation
Papers
Dividend Imputation, Investment and Capital Accumulation in Open Economies
Chung Tran and Sebastian Wende
Dividend imputation allows companies to pass on prot taxes to shareholders in form of franking tax credits. Would dividend imputation eliminate double taxation of capital income and induce more savings, investment and capital accumulation? We study this question in the context of a small open economy model with heterogeneous firms and investors. We find significant increases in capital accumulation and output under dividend imputation. Removing franking tax credits discourages domestic households/investors to save and invest; meanwhile, inflows of foreign capital do not fully oset such reduction in domestic savings. Richer households bear larger burden of capital income taxation, while poorer households enjoy welfare gains from more government transfers financed by additional tax revenue. Lowering taxes on dividend and capital gains, i.e., the American approach to solving the double taxation issue, mitigates the adverse effects; however, aggregate capital and output are still relatively lower than under dividend imputation. Interestingly, in our small open economy model international investors are not marginal investors due to heterogeneity in firm investment and valuation
Incidence of Capital Income Taxation in a Lifecycle Economy with Firm Heterogeneity
Chung Tran and Sebastian Wende
How should capital income be taxed? We revisit this salient question through the lens of a new tax incidence analysis based on a dynamic general equilibrium model with household and firm heterogeneity. We consider three capital income taxes: corporate income tax, dividend tax and capital gains tax. Our results indicate that taxing capital income at the firm side via a corporate income tax is more distortive than taxing it at the household side via a combined dividend and capital gains tax. Shifting capital tax burden from business to personal income taxes reduces deadweight losses and improves overall welfare. However, there is a large disparity in tax incidence in our heterogeneous agent framework. The economic gains of such a tax reform are shared unevenly across households but over time majority of current workers and future generations benet. Interestingly, a revenue-neutral reform that replaces a corporate income tax with dividend and capital gains taxes is not an optimal policy as the adverse welfare effects on current retirees are significantly large. In robustness check, we highlight importance of accounting for both household and firm heterogeneity for better understanding tax incidence.
On the Marginal Excess Burden of Taxation in an Overlapping Generations Model
Chung Tran and Sebastian Wende
JOURNAL OF MACROECONOMICS, VOLUME 70, 103377 | DECEMBER 2021
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We extend marginal excess burden (MEB) analysis in public finance literature to a dynamic general equilibrium model with incomplete markets and heterogeneous households. This extension allows us to quantitatively assess efficiency ranking and incidence of taxes. Our results indicate a disparity in welfare cost and distributional consequence of different forms of taxation on capital, labor and consumption. According to our MEB ranking, capital income taxation appears to be least efficient as it results in larger marginal excess burdens, compared to labor income tax and consumption tax. The tax incidence analysis shows variation of tax burdens across households, depending on their age, income type and generation. In particular, older households with higher income bear the highest burden of company income tax; meanwhile, future born households bear the highest burden of personal income tax. Hence, our MEB analysis demonstrates a fruitful approach to better understanding efficiency and incidence of tax reforms in one unified framework.