Tag Archives: taxation

Cyclical Policies and the Evolution of Long-Term State Capacity

Jahrbuch

This is a paper which links two related problems of policy making: problems of cycles (e.g. the adoption and abortion of a policy in a short run) and the more continuous problem of chronically weak state capacity. I argue that both are two different sides of the same coin. I use a highly stylized model, when and why political factions cannot agree on a common middle ground and then introduce ideologically opposed policies which will soon be reverted. I use a couple of historical episodes from Latin America, especially in terms of privatization vs. nationalization cycles, to illustrate the problem.

Here is the manuscript of the paper. Here is the link to the publisher.

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New article on frames in tax politics

Here is the link to a new article in Socio-Economic Review on the importance of frames in tax politics: http://ser.oxfordjournals.org/content/early/2016/11/19/ser.mww034.abstract.

figure1finalforwebappendix
(apologies for bad quality, I am working on it. For a better resolution see web appendix below).

The article shows two main things. First, the psychology of frames affects when politicians decide to implement what type of taxes, however, politicians themselves cannot easily use any type of frame, but they depend on whatever has resonance to the larger audience. Second, this implies that the (right or wrong) tax is not always adapted for the right reasons. For instance, efficiency considerations, held in high esteem among many economists, do not play a decisive role in the political process. There need to be other beliefs in place more related to ‘folk economics’. In combination both facts explain (to some extent) why VAT as a tax revenue was much more successful in Germany than in the UK. The figure above illustrates the different motives of left and right politicians for endorsing VAT. (It is based on predicted probabilities estimated with a model explaining the likelihood of using a given argument. See text for details.)

Here is an of the article: kemmerling_manuscript_ser

Here is an online appendix detailing the rather complex coding procedure of parliamentary debates in Germany and the UK over time: kemmerling_online_appendix

Will upload the data soon. If you need them earlier, send me an email.

Finally, here is the official abstract:

Left without choice? Economic ideas, frames and the party politics of value-added taxation
Achim Kemmerling

Abstract: This article investigates how different ideas about value-added taxation (VAT) frame the partisan politics of the welfare state. It employs a content analysis of German and British politicians’ motives in parliamentary debates on whether and why to increase VAT rates. A qualitative comparison reveals that there are remarkable differences between the two countries. In Germany, there is a clear and consistent shift in the efficiency frame from macroeconomic condemnation to microeconomic appraisal even among left politicians. This is not visible in British debates, where traditional partisan contestation prevails. The difference in efficiency frames is closely related to unemployment becoming a much more salient issue in Germany than in the UK. The quantitative analysis shows that speakers are indeed more likely to mention the efficiency frame when they are concerned about the labour market.

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Out now: How Labour ended up taxing itself and why it matters

I wrote a piece about the historical evolution of tax policy debates in Germany over the last 100 years. Took me quite a while to digest 50plus parliamentary debates, but it is fun to read the old typeset of the protocols 100 years ago.

bsb00018324_00033

By the way, chapeau to the Bavarian State Library to put all the debates online and with a search engine:
http://www.reichstagsprotokolle.de/index.html

How Labour ended up taxing itself and why it matters: The long-term evolution of politics in German labour taxation

Achim Kemmerling

Department of Public Policy, CEU Budapest, Nador Utca, Hungary

Achim Kemmerling, Department of Public Policy, CEU Budapest, Nador Utca 9, Budapest 1051, Hungary. Email: Kemmerlinga@ceu.hu

Abstract

This article argues that the long-term shift in the incidence of taxation from capital to labour has shifted the centre of political conflicts from representatives of capital to those of labour. The fact that most taxation has become an increasing and regressive burden on labour in mature welfare states creates new divides in tax policies among left politicians. To demonstrate this, the article applies the literature on new divides to the case of tax policy. A comparison of German tax policy debates in the late 19th and late 20th centuries reveals that major conflict lines were intra-class, and that over time these lines have shifted from capital to labour. The article concludes that as the origins of new divides are often endogenous to welfare-state politics, the literature on new divides greatly benefits from a historical ‘turn’.

http://esp.sagepub.com/content/24/2/150.abstract

For an older (a bit dated) working paper version see here

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Blog on Tax Haven now on LSE’s Europp Blog

My recent blog post is now also at LSE’s Europp Blog.

http://bit.ly/11seDNy

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On Cyprus, Tax Havens, and the EU

How the European Union creates Tax Havens, and Why this Matters for Understanding Cyprus

Tax Havens are not randomly distributed in this world. Rather, tax havens live in symbiotic relationship traditionally with a nearby larger country that has a huge financial sector: the Caribbean islands for the U.S., the Channel Islands for the U.K., or Liechtenstein for Switzerland. The small country has a regime that attracts huge inflows of capital with zero levels of income taxation. Since this foreign capital cannot really be invested in these small countries, or else rates of return would go down, it flows immediately on to a larger financial market where profits and returns are made.

Who can become a tax haven and who not? It turns out that not all countries have the structural conditions to easily specialize on the trade. Two major factors are the size of the country and the predictability of its legal framework. Let’s first turn to the size argument. It is well established in the literature on tax competition, that smaller countries are more likely to gain from competition. The reason is that if you are small, or very small in the case of some tax havens, it does not really affect your domestic tax base very much if you lower the tax rate to zero. The domestic tax base is minuscule compared to the tax base attracted from other countries. Tax havens can live with zero tax rates, because they make their money with licenses, indirect taxes and other types of revenues.

More important for an understanding of the Cyprus crisis is the second issue, the predictability of the legal framework. Private firms are concerned about the so-called hold-up problem. They don’t trust any type of government, since investors are afraid of future expropriations. In the economics literature, this is a well-known problem of credible commitment: How can governments of prospective tax havens assure private investors that they won’t violate property rights, once the investors have made their decision to invest?

There are no easy solutions to this problem, but a certain type of semi-sovereignty can act as a commitment device. Like Ulysses binding himself to the mast, some countries give up having a legal framework of their own but fully subscribe to a foreign countries framework. Many of the Caribbean Islands are either still overseas territories of former colonial powers or have semi-dependent status. Guernsey and Jersey don’t have to provide a credible legal framework since they are directly connected to the British legal system. Liechtenstein and Switzerland share an economic and currency union. These types of semi-sovereignty are an effective solution to the hold-up problem. Private investors know that, say, Guernsey, cannot and will not easily expropriate foreign investors. This makes such countries enormously popular destinations for huge inflows of capital.

In the European Union (EU), the problem does not stop here. If we apply the same logic we see that the EU has generated additional tax havens. To be fair not all tax havens are the same, but countries like Cyprus, maybe Latvia, and even Ireland share structural characteristics: they are small, and until recently they had a problematic track record of legal predictability, and in a larger perspective, prudent macroeconomic management. However, these countries have seen a tremendous inflow of foreign capital with EU accession. And not any type of capital flows but those suspicious ones that flow in and in many instances directly out again.

Why is that? Well many factors may play a role here. For instance, political transition has stabilized in many Eastern European countries and made them economically attractive destinations for capital inflows. Yet, in most cases the real boost comes with the adoption of the acquis communautaire, i.e. the legal framework of the EU, and eventually EU membership. Similar to Guernsey borrowing legal safety from the UK, Cyprus or Latvia borrow legal guarantees from member states with a better track record in avoiding explicit expropriation or expropriation by stealth such as high inflation.

The EU creates this problem arguably without intention. Capital flows to poorer countries are welcome, catching up will benefit also the older member states. But this is not true for any type of capital flows. To avoid these, the EU first needs to acknowledge that an unintended consequence of its enlargement strategy was to create excessive flows of certain types of capital. Second, it needs to build up a framework that differentiates between types of capital flows, monitors them carefully, and sanctions them way before a new Cyprus needs to receive a bail-out. Third, so far manly the countries of destination of capital flows have been punished, hence the EU needs to think much more about the countries of origins.

 

Literature:

Dharmapala, D., & Hines, J. R. (2007). ‘Which Countries Become Tax Havens?’ American Law & Economics Association Annual Meetings, No. 48.

Genschel, P., Kemmerling, A., & Seils, E. (2011). ‘Accelerating Downhill: How the EU shapes corporate tax competition in the Single Market.’ Journal of Common Market Studies, 1-22. For the working paper version see here.

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