D Murali

DRT discipline

D. MURALI | Updated on December 04, 2011

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If you are looking for a new tax, consider James Pierlot's ‘ Proposal for a Debt-Reduction Tax' or DRT, a paper arguing that tax cuts and spending increases should come only as dividends of debt reduction.

Proposing a debt-reduction tax irrevocably directed toward the repayment of the principal of Canada's national debt, he avers that such a legislated tax policy solution to debt reduction would ensure regular and predictable debt repayment, increase public awareness of the need to reduce the debt, enhance the federal government's budgeting flexibility and accountability for surpluses, and partially redress the inequity of inter-generational wealth transfer.

The essay opens engagingly thus: “My perspective is that of a fiscal conservative who is also a social liberal. Some would say that the two ideological perspectives cannot coexist. However, Canadians are generally comfortable with contradiction, and the duality is useful in describing what appears to be the federal government's current approach to the management of the nation's finances.”

And the paper concludes by reminding that the profits are likely to be greatest in countries that can achieve market-economy efficiencies while maintaining adequate levels of spending on health, social welfare, and education. “If we are to achieve this objective, we must rid ourselves of the albatross of debt that jeopardises the quality of life and social stability that Canadians have come to expect and will continue to want in the future,” urges Pierlot.

A fervent plea.

Alcohol externality costs

A paper by James J. Fogarty and Guy Jakeman ( http://ageconsearch.umn.edu/) can make for heady reading. Titled ‘ Wine tax reform: The impact of introducing a volumetric excise tax for wine,' the paper argues that the replacement of Wine Equalisation Tax (WET) in Australia with a revenue neutral volumetric excise tax would have a small negative impact on the wine industry; and that applying a uniform alcohol tax equal to the packaged beer excise rate across all alcoholic beverages would have a notable negative impact on the wine industry.

The ‘discussion' section of the paper cites research on how alcohol externality costs in Australia vary across beverage types. One such research is that of Srivastava and Zhoa (2010), who analysed national drug strategy survey data and found that: heavy binge drinkers are more likely to drink regular strength beer or RTDs (Ready To Drink); regular beer and RTD drinkers are more likely to drive a car or operate hazardous machinery while under the influence of alcohol; and beer drinkers and spirit drinkers are more likely than wine drinkers to report they missed study or work due to alcohol consumption.

Also cited is an earlier study (Gruenewald et al., 1999) in Western Australia that found: no impact from wine sales at licensed premises to drunk driving incidents; higher spirit sales at licensed premises were associated with more drunk driving but not accidents; and higher beer sales at licensed premises were associated with more accident and non-accident drunk driving.

In the opinion of the authors, given the large proportion of total alcohol externality costs associated with drunk driving, binge drinking incidents, and lost tax revenue from lower productivity, the findings of Srivastava and Zhoa (2010) suggest that the wine industry could reasonably argue that wine consumption is associated with lower externality costs than other beverages, and as such should be eligible for a concessional tax rate.

Who says tax cannot be addictive.

Geographic irrelevance

A recent paper from the University of Miami School of Law is George Mundstock's ‘ The borders of EU tax policy and the US competitiveness,' which concludes by stating that the current worldwide business income tax regime rests on the assumption that income has a natural source, but there is no economic basis for determining a geographic location for most types of income.

Appendix to the paper explains that, to a modern integrated multinational, there is no economic basis for determining hypothetical transfer prices in most cases. As a consequence, determining these prices and then policing them consumes considerable resources with no economic point, frets the author.

Of relevance to TP (transfer pricing) professionals is this quote cited in the paper: “A key obstacle in the single market today involves the high cost of complying with transfer pricing formalities using the arm's length approach. Further, the way that closely-integrated groups tend to organise themselves strongly indicates that transaction-by-transaction pricing based on the ‘arm's length' principle may no longer be the most appropriate method for profit allocation.”

Imperative study for tax practitioners.

Shifting evasion

Tracing that, in the last decade, many developing economies have resorted to cutting the corporate income tax rate in order to attract foreign direct investment and stimulate domestic business, Boryana Madzharova writes in ‘ The effect of low corporate tax rate on payroll tax evasion' ( www.ssrn.com) that while such policy clearly generates incentives towards more honest disclosure of corporate profits, it would be hasty to consider its effects in isolation from other tax bases within the economy.

The author cautions, for instance, that a too-low CIT (corporate income tax) can exacerbate payroll tax evasion if the contribution burden on employers is significant and payroll tax evasion is prevalent.

“Using firm-level panel data for Bulgaria, where the problem of contribution evasion is prevalent, we find that a 1 per cent increase in the net-of-tax-share of the corporate tax rate reduces reported wages in the economy by 0.21 per cent, but leads to higher taxable incomes. An identical increase in the payroll net-of-tax-share results in a 0.28 per cent rise in wages,” reports the author.

A section about ‘literature on evasion' cites recent empirical papers on contribution evasion in Asia, and in particular, China. An example given is of Nyland et al. (2006), who make use of firm-level data of audited businesses in Shanghai that either paid their contributions in full, underpaid, or overpaid. “They set out to determine the characteristics of firms who tend to underpay contributions and find that firm size plays a role in evasion. Their results show that in Shanghai big companies tend to evade more contributions relative to smaller firms.”

Recommended read for policymakers.

Published on December 04, 2011

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