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Article

Hairul Azlan Annuar, Khadijah Isa, Salihu Aramide Ibrahim and Sakiru Adsebola Solarin

The present study aims to investigate the impact of the reduction of the corporate tax rate on corporate tax revenue. The study adopts the theory of taxation by Ibn…

Abstract

Purpose

The present study aims to investigate the impact of the reduction of the corporate tax rate on corporate tax revenue. The study adopts the theory of taxation by Ibn Khaldun, depicted as the Laffer curve.

Design/methodology/approach

The paper analyses time series data for the period 1996 to 2014 using the autoregressive distributed lag (ARDL) approach.

Findings

The paper finds that the corporate tax rate has a dual effect on corporate tax revenue over the study period. It shows an inverted U-shape relationship between the corporate tax rate and corporate tax revenue and reveals that the optimal tax rate is 25.5156 per cent. Inferentially, a positive relationship exists between the two variables prior to the optimal tax rate, and a negative relationship prevails afterwards. A further test of causality shows a long-run unidirectional causality between corporate tax rate and corporate tax revenue.

Research limitations/implications

First, it should be noted that the policy was not implemented in isolation. Several other tax incentives were given to corporate tax payers, and therefore, such incentives should be controlled for to have a more insightful evaluation of the policy. Second and most important, there is a need to investigate whether the increased cash flow available to firms as a result of the reduction in the corporate tax rate adds value to firms. It is also necessary to investigate whether firms’ stakeholders benefited from the increased cash flow or was there managerial diversion of firms’ resources.

Practical implications

The policy of gradual reduction of the corporate tax rate in Malaysia is suspected to have a positive impact on the productivity of Malaysian companies, which has contributed to an increase in corporate tax revenue. It also has a positive impact on the economic growth of the country. It means that the lower corporate tax rate has actually reduced the cost of doing business in the country.

Originality/value

The benefit of increased corporate tax revenue needs to be investigated empirically for insightful policy evaluation. In Malaysia, however, such investigation is close to non-existent to the best knowledge of the researchers. Thus, the present study aims at investigating the impact of the policy of gradual reduction of the corporate tax rate on corporate tax revenue over an 18-year period from 1996 to 2014.

Details

ISRA International Journal of Islamic Finance, vol. 10 no. 2
Type: Research Article
ISSN: 0128-1976

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Article

Ritwik Banerjee

Unsustainable levels of debt in some European economies are causing enormous strain in the Euro area. Successful debt consolidation in high-debt economies is the single…

Abstract

Purpose

Unsustainable levels of debt in some European economies are causing enormous strain in the Euro area. Successful debt consolidation in high-debt economies is the single most important objective for the European policy makers. The paper aims to discuss these issues.

Design/methodology/approach

The author uses a dynamic general equilibrium closed economy model to compute the dynamic Laffer curves for Portugal, Ireland, Greece and Spain for different class of taxes. The general equilibrium effects of the interaction of labor tax, consumption tax and capital tax is demonstrated.

Findings

Location of each economy on its Laffer curve suggests that there exists a scope for considerable revenue generation by raising consumption and labor tax rates but no such possibilities exist for capital tax rate. Thus revenue generation with certain tax rates as instruments, holds key to successful and sustained debt reduction.

Originality/value

This to the best of knowledge is one of the first papers which looks closely at the tax revenue – tax rate panel for the major deeply indebted European economies.

Details

Journal of Economic Studies, vol. 41 no. 6
Type: Research Article
ISSN: 0144-3585

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Article

Aleksandar Vasilev

The purpose of this paper is to show a standard RBC model, when augmented with a VAT evasion channel, where evasion depends on the consumption tax rate, can produce a…

Abstract

Purpose

The purpose of this paper is to show a standard RBC model, when augmented with a VAT evasion channel, where evasion depends on the consumption tax rate, can produce a hump-shaped consumption-Laffer curve.

Design/methodology/approach

The methodology is in the spirit of modern quantitative macroeconomic literature.

Findings

The model with VAT evasion can generate a peaking consumption tax revenue curve, which is a little discussed result in the taxation literature.

Research limitations/implications

The paper contributes to the public finance literature by providing evidence for the importance of the evasion mechanism, while at the same time adding to the debate about the existence of a peak tax rate for consumption tax revenue.

Practical implications

Contrary to popular belief, raising VAT rate as a cheap way (being a tax on demand) to finance government expenditure, is still not a free lunch, and raising the rate, especially in a country with substantial VAT evasion, quickly leads to a drop in the revenue associated with that category.

Originality/value

This is the first study that provides a tractable model of VAT evasion, and a setup where consumption tax revenue curve is peaking.

Details

Journal of Economic Studies, vol. 45 no. 3
Type: Research Article
ISSN: 0144-3585

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Article

Nigel Culkin and Richard Simmons

Much has been written about trade deal opportunities after Brexit (e.g. Minford et al., 2017; Singham and Tylecote, 2018) but much less about envisaged “supply side…

Abstract

Purpose

Much has been written about trade deal opportunities after Brexit (e.g. Minford et al., 2017; Singham and Tylecote, 2018) but much less about envisaged “supply side mechanisms” that would translate a Brexit shock into improved UK competitive performance. Indications as to the supply side mechanisms involved can be found in some pro-Brexit writings and speeches and revolve around cutting regulation and reducing taxation, to spur innovation entrepreneurship. The authors contend that these measures align to a broad set of policy measures associated with Economic Shock Therapy, the Laffer Curve and the associated “Washington Consensus” (Williamson, 2005). The authors are looking to stimulate a conversation around whether these measures are most likely to stimulate entrepreneurial innovation and growth. The authors open by contrasting these concepts to growth equilibrium dynamics drawn from Wicksell, Keynes and Schumpeter – and by implication dynamic Walrasian General Equilibrium – to pose the question, is entrepreneur-led growth best led via slashing regulations and taxes or by focussing on correcting existing market failures? The purpose of this paper is to promote controversy and debate as to which “supply side measures” are most effective in enabling entrepreneurial growth.

Design/methodology/approach

The authors briefly review the pro-Brexiteer economic framework and relate this to broader Economic Shock Therapy and Laffer Curve concepts; how these have been applied and how some argue they can become “supply side” enablers in a positive Brexit innovation and entrepreneurship transformation. By drawing upon fundamental economic relationships such as Wicksell’s (1898) “Natural Rate of Interest”, the authors highlight the importance of information asymmetry and regulatory distortion in financial markets, resulting in some entrepreneurs (and associated innovations) failing to receive the capital their project merit. The authors pose the question, whether Shock Therapy, Laffer Curve type tax cuts and any Brexit “bonfire of regulation” will raise entrepreneurial growth and success.

Findings

Both Shock Therapy and Laffer Curve inspired tax cuts have a patchy record of success, despite notable achievements in post-1991 Poland. The authors stress entrepreneurs drive innovation and growth, and a key support to them requires correcting “access to finance” market failures. It is questionable if Economic Shocks contribute anything to resolving this fundamental problem.

Originality/value

The authors open the supply side debate on anticipated “Brexit Transformation” in the context of long standing (some maybe long forgotten) theoretical understandings, thereby posing the question as to whether potential Brexit-related deregulation, tax cuts and “Economic Shock” therapy are likely to raise entrepreneurial competitive advantage and success rates. Market failure in financial market support for small firm growth and innovation needs are highlighted. Arguably, economic growth and innovation would be better sustained by addressing these failures, than introducing the “unknowns” and risks associated with a substantial Economic Shock.

Details

International Journal of Entrepreneurial Behavior & Research, vol. 25 no. 2
Type: Research Article
ISSN: 1355-2554

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Article

Natalia V. Trusova, Inna Ye. Yakusheva, Yuliia M. Zavoloka, Alina H. Yefremenko, Yuliia A. Malashenko and Maryna V. Sidnenko

The article deals with the imperatives of functioning of the financial market of Ukraine in the global space of debt loading.

Abstract

Purpose

The article deals with the imperatives of functioning of the financial market of Ukraine in the global space of debt loading.

Design/methodology/approach

Within the Laffer debt curve model, the dependence of gross domestic product (GDP) change on the level of debt of the financial system for countries that form the economic core in the global financial space and well control the level of the indicator, as well as new member states that have a different level of secure debt loading and affect the portion of the financial market that forms a portfolio of securities to cover the cost of nonperforming government securities is mentioned.

Findings

It has been shown that stock indices, as constituent indicators of changes in the price environment of a certain group of securities in time space, allow to estimate the general direction of the market movement even when prices within the index basket change in different directions.

Originality/value

The dynamics of changing the debt loading of the financial system of Ukraine in the current, medium-term perspective is analyzed. The amount of the fixed and floating rate debt of the government internal securities is determined to ensure the diversification of interest rate risk. Using the parameters of the model of approximation functions of dimensionless quantities, the corridor of a safe level of general government debt in the country was determined.

Details

Journal of Economic Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0144-3585

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Abstract

Details

Mastering Brexits Through The Ages
Type: Book
ISBN: 978-1-78743-897-2

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Book part

Thomas A. Stapleford

The history of economics has often been described as the “history of economic thought.” In this essay, I explore an alternative perspective that builds on the French…

Abstract

The history of economics has often been described as the “history of economic thought.” In this essay, I explore an alternative perspective that builds on the French tradition of historical epistemology and treats economics as a social practice. I argue that a practice-based view provides a more philosophically robust conception of historiography and a richer field of investigation for historians of economics.

Details

Including a Symposium on the Historical Epistemology of Economics
Type: Book
ISBN: 978-1-78714-537-5

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Article

Ahmet Özçam

Traditionally, the Laffer effect has been discussed in the context of endogenous growth models or in the case of the labor market with respect to willingness to supply…

Abstract

Purpose

Traditionally, the Laffer effect has been discussed in the context of endogenous growth models or in the case of the labor market with respect to willingness to supply more labor given a tax incentive on wages. The paper adopts an inductive approach to discuss it in the context of a product's market, say automobile industry in Turkey.

Design/methodology/approach

The author revisits the ad valorem tax model on a product and investigates how the elasticities of demand and supply and the tax rate are related to the Laffer effect. The author considers a special case where demand curve is non-linear and the supply curve is completely elastic. This specific model fits the practical case where the Turkish government expected the auto sellers to pass fully the temporary partial tax concession onto the consumers during the global crisis in 2009.

Findings

The author showed that the demand elasticitiy must be calculated neither at the intersection of the initial equilibrium nor that of the final equilibrium points, but somewhere else. The author defined a pass-through coefficient which was different from the classical burden of tax concept, calculating the degree of pass-through of a tax decrease from firms to consumers. Moreover, the author found a one-way relationship between the overall tax revenues of the government and a single sector.

Research limitations/implications

The case of tax revenues where both the demand and supply curves are non-linear and non-extreme must be solved.

Practical implications

The author showed that the government's dual expectation of both boosting the economy, increasing employment and raising its tax revenues can sometimes be consistent given a usual upward sloping supply curve. In the case of a perfectly elastic supply curve, the tax revenues can even be higher with a higher level of equilibrium quantity.

Social implications

The Turkish government aiming to support the production and employment in this leading export industry, may have expected this temporary tax decrease to be passed completely onto the consumers by the producers. However, this did not happen as producers’ prices to the consumers did not decrease as much as the amount of tax. This paper shows that the after tax elasticities and the current level of tax rate must have been compared.

Originality/value

The author pointed out to the importance of being clear in explicitly indicating at which points the elasticities derived from some function (tax revenue function) of equilibria variables (price and quantity) must be interpreted. In this paper, doing many numerical calculations allowed us to notice the proper point of calculation of the demand elasticity, which is the after-tax price along the “no tax demand curve”. Moreover, a pass-through coefficient is defined which is different from the classical burden of tax concept.

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Article

Konstantinos J. Liapis and Evangelos D. Politis

The purpose of this paper is to study the effect of income and property taxes on property assets through the application of fair value accounting and deferred income tax standards.

Abstract

Purpose

The purpose of this paper is to study the effect of income and property taxes on property assets through the application of fair value accounting and deferred income tax standards.

Design/methodology/approach

This approach is based on the whole life costing model that accounts for the initial expenses, operation and maintenance costs, future revenues, and residual value.

Findings

Formulating a step-by-step accounting procedure based on fair valuation and temporary differences in taxation, this paper shows the existence of the Laffer curve and thus elucidates the economic effect of the taxes and fully discloses the asset’s fair value. The optimal taxation rate is lower when a property tax and an income tax are both present, as the the marginal gain from both taxes is constantly decreasing, due to the changes in the fair value of the asset, and even has a negative effect in the case of the income tax.

Practical implications

Accounting techniques, which combine market-based assumptions, financial valuation techniques based on discounted fair value models, and standard International Financial Reporting Standards disclosures, prove to be an unbiased proxy for the optimal taxation rate.

Originality/value

This study demonstrates a practical tool for policy makers who are trying to define macroeconomic policies on property taxation. Moreover, this approach can be used as an evaluation model for individual investors who wish to measure the future prospects from a property investment under taxation uncertainties.

Details

Journal of Property Investment & Finance, vol. 36 no. 3
Type: Research Article
ISSN: 1463-578X

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Article

Kelbesa Abdisa Megersa

The study of the link between debt and growth has been full of debates, both in theory and empirics. However, there is a growing consensus that the relationship is…

Abstract

Purpose

The study of the link between debt and growth has been full of debates, both in theory and empirics. However, there is a growing consensus that the relationship is sensitive to the level of debt. The purpose of this paper is to address the question of non-linearity in the long-term relationship between public debt and economic growth. Specifically, the author set out to test if there exists an established “laffer curve” type relationship, where debt contributes to economic growth up to a certain point (maximal threshold) and then starts to have a negative effect on growth afterwards.

Design/methodology/approach

To carry out the tests, the author has used a methodology that delivers a superior test of inverse U-shapes (Lind and Mehlum, 2010), in addition to the traditional test based on a regression with a quadratic specification.

Findings

The results in the paper present evidence of a bell-shaped relationship between economic growth and total public debt in a panel of low-income Sub-Saharan African economies. This supports the hypothesis that debt has some positive contribution to economic growth in low-income countries, albeit up to a point.

Practical implications

The overall result supports the claim that public debt may start to be a drag on economic growth if it goes on increasing beyond the level where it would be sustainable.

Originality/value

This paper leads the way by implementing a robust test of non-linearity (“inverse-U” test) to the analyses the debt-growth nexus and the laffer curve in Sub-Saharan Africa.

Details

Journal of Economic Studies, vol. 42 no. 5
Type: Research Article
ISSN: 0144-3585

Keywords

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