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on Public Finance |
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Issue of 2009‒03‒28
two papers chosen by |
| By: | Giorgio Bellettini; Filippo Taddei |
| Abstract: | Taxation of bequests and donations is an important determinant of real estate prices. We show that, ceteris paribus, a decrease in taxes on inter vivos donations and bequests brings about an increase in real estate prices. We provide a general equilibrium rationalization in the context of OLG economies featuring intergenerational altruism. This has relevant policy implications. We test the predictions of our theory employing a unique policy shock: the abolition of bequest and donation taxation that took place in Italy in 2001. Considering this policy shift provides the first evidence that a drastic reduction in bequest and donation taxation significantly increased real estate prices. Our estimates suggest that the 2001 abolition of taxation on bequests and donations alone led to an appreciation of residential real estate in excess of 10%. |
| JEL: | E60 E65 H24 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:107&r=pub |
| By: | Christian Keuschnigg; Evelyn Ribi |
| Abstract: | In the absence of financing frictions, profit taxes reduce investment by their effect on the user cost of capital. With finance constraints due to moral hazard, investment becomes sensitive to cash-flow and own equity of firms. The impact of taxes changes fundamentally. Taxes reduce investment because they erode cash flow and, thereby, a firm's pledgeable income available for repayment to outside investors, and not because they reduce the user cost of capital. We propose a corporate finance model of investment and derive three central results: (i) Even small taxes impose first order welfare losses on financially constrained firms; (ii) ACE and cash-flow tax systems, which are investment neutral in the neoclassical model, are no longer neutral when firms are finance constrained. (iii) When banks are active and provide external finance together with monitoring services, the two systems not only reduce investment, but are also no longer equivalent. With active banks, investment is subject to double moral hazard and the timing of tax payments becomes important. The ACE system gives tax relief at the return stage and provides better incentives than a cashflow tax which gives tax relief upfront. |
| Keywords: | Finance constraints, profit tax, cash-flow tax, ACE tax |
| JEL: | G38 H25 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2009:2009-05&r=pub |