Taxation Economics PDF

TOPIC 1 TAXATION ECONOMICS Taxes associated with civilization appear with the first human civilizations. Taxes are associated to political power. The history of taxes is the history of political systems , taxes are not the drivers of history, but the outcome of political equilibriums. Taxes are a h...

TOPIC 1 TAXATION ECONOMICS Taxes associated with civilization appear with the first human civilizations. Taxes are associated to political power. The history of taxes is the history of political systems , taxes are not the drivers of history, but the outcome of political equilibriums. Taxes are a hot political debate, very often decoupled from economic analysis. Taxes to secure private property. “Taxes are what we pay for a civilized society” Oliver Wendell Holmes Jr. -(EXILE TAX: impuestos especiales): if you want to export,import, to sell something example; tobacco and alcohol Why do you think taxes exist in a country? -Public services -Government( power) -Public Expenditure -WFS -Society→ Institutions→ Civilizations →Taxes are the outcome of political equilibrium or particular hierarchical structure →Not exist Civilizations without taxes How can power shape the taxation system? Taxes are going to sustain a social order Do you think that Democracy changed the taxation system? Yes we have the right to vote 0.PUBLIC ECONOMICS Public economics: study of the role of the public sector in the economy. ( studies income and expenditure) Public sector might intervene in the economy through different ways: ➔ Regulation: through legislative and executive action ➔ Taxes: main source of income of modern public sectors ➔ Expenditures: tax revenue usually finance the Welfare State (education, social insurance, health care) ➔ Macroeconomic stabilization: through monetary policy (central Bank) and fiscal policy (government). ➔ Tax used as an Automatic stabilizers(without increasing or decreasing the tax, the outcome of the tax is going to change with the economic cycle,of the opposite sense of the economic cycle): the unemployment→ the unemployment rate increases we are in a recession, when economy goes down, unemployment benefits goes up  TAX: PIT, when you have a high income, the pit will increase, which will drain money from the economy, is going to reduce the money available in the private economy. 01 EXAMPLE OF TAXATION POLICY BEARD TAX Instituted in 1698 Russia by Peter the I (Pyotr Alekseyvich Romanov, Peter the Great, 1672). He traveled to Europe between 1697 and 1698 (Oxford University, the British Royal Mint, and the Dutch naval yard).When he came back he embarked on an ambitious project for modernizing Russia: revised calendar, introduced changes in written Russian, changed the military system…and tried to get Russians beardless, like the European fashion ➔ Progressive tax: a poor would pay two kopeks, while a well-off merchant could expect to shell out 100 rubbles ➔ Physical characteristics taxed WINDOW TAX Instituted in 1696, The tax was levied on the landlord,so that windows were boarded up No definition of “window” was included in the tax,so that even the smallest openings in a wall were taxed. It was repealed in 1851. (Daylight robbery) Thought to be a progressive tax, those who owned a house with lots of windows were taxed. Very bad defined, tax base: quantity or money upon which the tax is implemented ( amount of windows is the tax base) “VECTIGAL URINAE” - “Pecunia non olet”.( money doesn't stink) Credited to have helped to construct Coliseum -To dissolve the fat, washing the teeth, vet expensive and quietly used. BACHELOR TAX Used by: Ancient Rome (Emperor Augustus, 18 BC) UK (Marriage Duty Act, 1695) Russia (Peter The Great, 1702) US (State level taxes, i.e., Missouri 19th and 20th century) Argentina, South Africa (early 20th century) Purpose: To encourage men to marry and support families. Details: In countries like the Roman Empire, Italy, and even the U.S. state of Missouri in the early 19th century, bachelors were taxed because they were seen as not contributing to the growth of society through family life. 0.2 TAXES? SOME PRELIMINARY In general the higher the GDP the higher the expenditure Economic policy US: Inflation Reduction Act, 2023, Trump promises tax cuts Budget discussions 2024: UK Sin taxes? taxes associated with bad behavior( alcohol, tobacco) reduce consumption. Related to environmental protection and health protection. PIGOUVIAN TAXES Environmental Taxes?: Reduce C02 emissions Pigouvian taxes ( energy taxes, pollution taxes) Taxation and inequality: Graphs that express a relationship between how taxes and transfers reduce income dispersion→ difference between different social groups in a country. HIGH social dispersion, high inequality and vice versa. Income dispersion Very important tax credits Important measure, Tax ratio → TAX/GDP x100 Most important tax PIT: usually progressive (the higher the income, the higher tax rate)/ Flat tax( the higher the income, the more you pay).Affects income distribution Labour : taxes (modify outcome market →secondary distribution income) market primary income distribution Taxes as the outcome of political equilibriums Who collects taxes? ➔ Are the pizzo (“protection” payment) a form of taxes? extortionary payment you make to the mafia, in order to protect you. ➔ Taxes are collected by the State → What is a state? →“A continuous and compulsory political organization whose administrative staff( bureaucrats,civil servants) successfully uphold the claim to the monopoly of the legitimate use of physical force in the enforcement of its order” organization that protects by force its  own “existence and order within a territorial area” (Weber) → internal ( dictatorship, use of force) and external!!? legitimacy (through the electoral systems) is essential for state’s recognition. ➔ The concept has evolved: lower to higher developed ◆ Tribute state: Coercive, taking money from regions with violence, ej roman empire, no standardized taxes. (public debt inexistent) ◆ Tax state: Structured way of collecting taxes, more predictable ,negotiable, social structure,legal framework how much taxes you have to pay , standardized taxes ej feudal kingdoms→ 2% TAX /gdp (public debt very low) ◆ Fiscal State: tax capacity increased, bureaucratic and complex system, modern state→ 10% TAX/gdp.(public debt low) ◆ Transfer State: latest development ,now,most advanced, capacity of redistribution, public debt very important →35% TAX/gdp( public debt high) ➔ Schumpeter in The Crisis of the Fiscal State explains how taxations systems are linked to political systems ➔ Examines The evolution of European states from feudal domains to tax-based systems, focusing on the challenges faced by the tax state model Crisis of the tax state ( institution that had standardized taxes, bureaucratic system) BY SCHUMPETER TEXT -SC argues that fiscal crisis are not isolated, they are the outcome of all crisis happening deeper 1) Fiscal policy is a reflection of social & political structure : FP Expenditures and taxes 2) Modern states have increased pressure to tax or increased fiscal pressure 3) Traditional tax system as an ideology, are inadequate to finance the new needs of modern taxation system 4) Class struggle might play an important role, richer individuals might not want to be taxed, low income individuals may opposed taxes 5) Impact on political stability: lead to political crisis due to the fiscal reform 6) Conclusion: He doesn't offer a solution, but he proposes that fiscal systems and tax systems have to be evolving on time and to be adapted to the current needs of those particular societies where they are imposed, so that we can’t rely on the same taxation system since history. Studying taxation, what does it mean Fiscus, is a basket for holding money The notion of a fiscal regime evokes a systematic order or institutional structure However, a description of a fiscal regime is not only a detailed account of the taxes levied by the system because taxes also have important effects on a state's political, economic, military, and social development. Broader concept. Fiscal constitution (Brennan and Buchanan, 1980): the body of fundamental rules and regulations that frame decision making in the area of fiscal policy. 1. legitimization:--> U.S tea party power UK taxes 2. Public good against private gain 3. legal recourse→ tax is law 4. Accountability: the power in a democracy to be accountable ( electoral process, judicial process) TOPIC 1: TAX HISTORY, THE BIRTH OF TAXATION 1.1 WHEN DO TAXES APPEAR: ANCIENT EMPIRES I. Tribute states The exact point in time when a tax was first introduced is unknown but we know that they existed in old civilizations First taxes in Egypt (3.500 BC)…. payments in kind. First records: postage stamps and on jars and vases in King Scorpion I’s tomb. Link between the first human writings and first taxes Taxes in Ancient Egypt Well developed and intricate tax system: Grain and Produce Taxes; Labor Taxes (Corvée System); Land Taxes; Poll Taxes Trade and Customs Duties; Temple Taxes Egyptians, Greeks EGYPT 3,500 BC MESOP 2500 BC INCA 1400: Tribute state Taxes in Ancient Greece Differences across cities. How Athenians collected taxes. The taxpayers were divided into 100 symmories(συμμορίαι, taxation groups) and either from 378/7 or a little later the three wealthiest men in each symmory had to pay a proeisphora (an advance eisphora payment) for the whole symmory and then collect the eisphora from the rest Inheritance tax created by the egypcians. IT tax on the property that a heir receives State tax: ST tax on the total value of a decedent’s property Gift tax: GT paid by the donor (US) or the donee (Spain) on the value of the property transferred taxpayer; persons pay taxes tax event: PIT( GENERATED INCOME),VAT ( consumption) IT(what we inherit) WT( having wealth) Horizontal equity: People with same income situation should pay same taxes, treated equally Vertical equity ( progressivity): people with different income situations should pay different taxes 2 individuals (horizontal equity respected?)no 100k from labor 45% tax 100k from IT pays 0%tax Gift tax→ donaciones Inheritance tax→ sucesiones state tax→ US → to die→ Death tax eisphora not compulsoty, collected when there was a war city divided in symmories, from that symmorie representative (wealthy individual)→ city POWER→SOCIAL ORDER /→INSTITUT → TAXES Old taxation systems: tax states A solution: publicanii Small state without a large body of bureaucrats, how to enforce taxation? Tax farmers: the publicani. Rome rulers became more dependent on the publicanii The publicans became a distinct group within a diverse social order and even within the ruling oligarchy: they had votes and resources to offer. The oligarchic regime → stability for the next 280yrs Population What effect on fiscal system? 2. PHASES OF MODERN TAXATION Before the modern taxation US: taxation led to the independence war (1776) France: in the Old Regime nobility was exempted of paying taxes Political equality needed old privileges to be removed FIRST PHASE OF THE MODERN TAX HISTORY Patriotic act, they where appealing to the patriotism of English people, to finance the war, bc they where at war with france ➔ UK was the first country to establish personal income tax in 1799 ➔ Used to pay 90% ➔ During the 19 th century many countries established the PIT ➔ Statutory tax rate are marginal tax rate stated in the law, what we pay is the effective tax rate (lower) ➔ Statutory > Effective tax rate Few citizens were subjected to income tax labor income (Earnings from work (salary/wages), and capital income Earnings from investments (interest, dividends). +gains and loss( invest in shares ) +economic activity( self employee) —------------------ TOTAL INCOME —------------------ them applying acc personal circumstances; Reductions / deductions/ tax credits —------------------- tax base( total income+ red) x tax base Statutory Tax Rate: The official tax rate set by law. Effective Tax Rate: The actual percentage of income paid in taxes, which is usually lower due to deductions and credits. SECOND PHASE OF THE MODERN TAX At the beginning taxes were vey vey low. In the 18 th century, different countries started to establish the PIT: sweden, japan,italy, new zealand, netherlands Very few individuals paid taxes US,UK led the path toward progressive taxation WWI: increase taxation to finance the war, mass mobilization Two reasons: I) the need to mobilize enormous resources for the war and II) Compensatory arguments Dedicated to public expenditure it doubled , effects of the war France & germany increase in mass mobilization II. Compensatory arguments: (taxes are justified because there are some sector in society that are taking advantage from that situation) The context of taxation: although in 1914 the income tax was established in many countries, and many observers saw it as the wave of the future, the top marginal rates of income tax universally remained extremely low often in the single digits Compensatory theory: Suggests that if taxes on the rich compensate for some other privilege granted by the state, then in this case progressive taxation is fair. The conscription of wealth was accepted in order to finance progressive taxation WIFO TAXES: In case extraordinary situations such as wars  Democratic countries increased more top marginal rates ➔ Dictatorships or democracies have incentive to maintain public support for the war ➔ However, the incentives are stronger in democracies where the treatment of citizens as equals is a benchmark of the political system There is a higher taxation in democracies than in dictatorships THIRD PHASE OF MODERN TAX HISTORY from warfare state of WWII to European welfare state I. Transfer states Second increase of taxation World War 2 increased dramatically public expenditure (especially military expenditure) Public opinion was shocked by the consequences of the mass mobilization for WWII The US is the only country for which we have public opinion polls. 1. Europe was the theater of the two world wars. After World War II, Europe also became the ideological battleground between capitalism, represented by the USA, and communism, represented by the USSR → Geopolitical interest in Europe’s reconstruction 2. From 1945 onwards, the ECSC was created and the institutions related to the welfare state began to expand → Political interest of European countries to reconstruct the continent 3. The Marshall plan allowed to begin the reconstruction → Capacity to finance Social estate was created with the expansion of the social expenditure FOURTH PHASE OF MODERN TAX HISTORY: STAGNATION AND DECLINE ➔ Tax expansion stops in the 1960s and is reversed in the 1980s ➔ Top income tax rates are reduced throughout the world ➔ Top Corporate Income Tax are also reduced ➔ Wealth taxation is dramatically reduced, until almost its disappearance ➔ Tax revenues continue to increase Tax as a result of political equilibriums Different phases of taxation correspond to different political waves These political waves use different economic theories to justify their proposals Before Keynes: taxes didn’t have any meaning After Keynes: taxes were functional to the new welfare state After Reagan/Thatcher: they argued that the high tax requirements of mature welfare states discouraged work and investment. 3. CURRENT TRENDS IN TAXATION Measures of tax burden and its limitations Three Main Tools for Profit Shifting: Transfer Pricing: This is the method by which one subsidiary of a company sells to another at a price that allows the company to allocate profits in low-tax jurisdictions. Internal Debt: Generating debt between subsidiaries enables the deduction of costs in high-tax areas, thereby lowering tax burdens in those regions. Intellectual Property (IP): Companies with large intellectual property assets (e.g., Google’s algorithm) place these assets in low-tax jurisdictions. Subsidiaries then pay fees for using these assets, allowing the company to generate higher profits in favorable tax locations. Apple’s Structure and Subsidiary Example: Apple uses subsidiaries in Ireland and other low-tax countries to minimize its tax obligations. Products are bought in Asia (production subsidiaries) and sold to European subsidiaries, with most profit declared in Ireland. Apple Sales International’s profit allocation strategy allows it to pay less than 1% in effective taxes instead of Ireland’s 12.5%. European Union Policy on State Aid: The EU argues that Ireland granted Apple state aid by providing favorable tax treatment. This is illegal under EU rules, which prohibit member countries from giving tax advantages to a single company. Ireland allows Apple to declare profits in a "head office" with no location, enabling Apple to avoid taxes in both the U.S. and Ireland. Impact on Investment Decisions: The deductibility of debt and other expenses can influence a company’s decision on how to finance its investments (through its own resources, debt, or equity), affecting the final cost and expansion decisions. Legal Accusations and Consequences: The EU reviewed Apple’s case from 2013, arguing that Ireland allowed Apple to artificially reduce its tax burden, a benefit given exclusively to Apple, deemed illegal state aid. Public Deficit and Treasury Structure: The instructor outlines the distinction between the national treasury (where all taxes are collected) and the social security treasury (funded specifically through contributions from workers and businesses). In Spain, contributions to social security are separate from general tax revenue, which supports all public services. Centralization vs. Decentralization: A comparison of countries like Spain, France, and Germany shows varying degrees of decentralization: Spain has an intermediate level with autonomous communities that have some capacity to collect taxes. France lacks these intermediate structures, resulting in a more centralized system. Germany has a highly decentralized model with regional (state-level) tax collection powers, providing greater fiscal autonomy. Municipal Tax Collection: Municipalities generally have limited tax collection capacity. In decentralized countries, such as Germany and Switzerland, intermediate levels have higher tax authority compared to municipalities, which focus on local responsibilities (e.g., roads, garbage collection). Tax Collection Data and Nominal vs. Real Measures: The importance of differentiating nominal tax collection (total dollars collected) from more meaningful measures like tax-to-GDP ratios is emphasized. Nominal values can be misleading for comparisons without accounting for GDP or adjusting for inflation and other factors. Limitations of Tax-to-GDP Ratios: Several factors complicate using tax-to-GDP ratios to compare countries, such as: Tax Expenditures: Deductions and credits that reduce effective tax rates. Social Security Contributions: In some countries, social benefits are taxed; in others, they are not. Cyclical Sensitivity: During economic recessions, tax revenues can drop with GDP, affecting the ratio. Measurement Challenges: Revisions to GDP estimates (e.g., post-pandemic adjustments) can distort past data. Tax Evasion and Collection Lag: Tax evasion impacts effective tax collection, and delays (e.g., two-year lags in Spain’s autonomous community financing system) further complicate fiscal analysis. Average Tax Rates: Another measure, the average tax rate, represents the percentage of an individual’s income paid in taxes. However, defining total taxation and income accurately is challenging due to differences in tax definitions, exemptions, and income types. PIT progressive CIT: flat 25% taxes higher in spain? decentralization process: - expenditure - collect income - legislattio texas: CA.AAC,mUNICIPALITIES—> national treasury CONTR: Social security—SStreasury taxes paid accounting benefit outcome sales- benefits , profts Taxes paid tax base Definition: Average tax rate is defined as the total tax paid divided by the total taxable income or base, giving a ratio that reflects the share of income paid in taxes. This measure helps to determine the effective burden of taxation on an individual or entity Marginal effective tax rates: measure what part of an increase in earnings, due for instance to an increase in the number of hours worked or to a change in employment situation, is "taxed away" by the imposition of personal income taxes and employee social security contributions, and the possible withdrawal of earnings-related benefits (social assistance, housing benefits, family benefits, unemployment benefits, in-work benefits). 4. CURRENT TRENDS STYLIZED FACTS TAX MEASURES: 1.NOMINAL TAX COLLECTION: amount of taxes collected. Cons: -Does Not give us more information by itself, - we don't have a reference of the income. - It also has inflation. - If not red prices. Pro: analyze the evolution of tax collection in a country 2. NOMINAL TAX RATES/ STATUTORY TAX RATES: Allows us to analyze what is the tax structure of the countries, to compare with other countries and we can see the evolution of tax rate in a country Cons:Nominal is higher than effective, it give us a tax rate but different to the real amount of a tax burden 3.TAX TO GDP RATIOS: Allows us to compare % countries(tax/GDP). It is the one we are currently using, so it is the most important measure- Cons: Tax credits/ expenditures, measures of GDP ( f.e Spain and its underestimation of GDP measure won’t be accurate. ( Just be used for a country) 4. AVERAGE TAX RATES rates→ can be used for an ind/corporation): tax amount you are paying/ some taxable income. We don't really have a base of tax income. Tax payments we can really know which is the tax burden. Taxable income( problematic % big and small business) → decide in which jurisdiction to declare and profit). How to calculate it? shares are not taxable unless you sell them -corporate tax collection graph Cons: profit shifting behavior. Evasion 5.MARGINAL EFFECTIVE TAX RATES: amount of Y that is going Y that is going to taxes whenever your Y increases. It is effective marginal, it is going to be affected by several reasons: tax may increase if Y increases, or f.e in subsidies if Y increases, subsidies will decrease. You know the effect of taxation/benefits on labor supply This is important for woman labor support Cons: We can't observe it, we have to estimate it.. 6.TAX WEDGE : GDP% what the employees pay and what you receive( SS can't pay payroll taxes ) It is the diff %). The total labor cost for employees and what the employees are really receiving withdrawals. Effects of taxes on labor supply Cons → Non observable tax wedge graph Spain is lower in taxation than OECD average, USA