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Philipp Engler, Mr. Giovanni Ganelli, Juha Tervala, and Simon Voigts
Using a DSGE model calibrated to the euro area, we analyze the international effects of a fiscal devaluation (FD) implemented as a revenue-neutral shift from employer's social contributions to the Value Added Tax. We find that a FD in ‘Southern European countries’ has a strong positive effect on output, but mild effects on the trade balance and the real exchange rate. Since the benefits of a FD are small relative to the divergence in competitiveness, it is best addressed through structural reforms.
Ms. Grace Weishi Gu, Ruud A. de Mooij, and Mr. Tigran Poghosyan
This paper explores how corporate taxes affect the financial structure of multinational banks. Guided by a simple theory of optimal capital structure it tests (i) whether corporate taxes induce subsidiary banks to raise their debt-asset ratio in light of the traditional debt bias; and (ii) whether international corporate tax differentials vis-a-vis foreign subsidiary banks affect the intra-bank capital structure through international debt shifting. Using a novel subsidiary-level dataset for 558 commercial bank subsidiaries of the 86 largest multinational banks in the world, we find that taxes matter significantly, through both the traditional debt bias channel and the international debt shifting that is due to the international tax differentials. The latter channel is more robust and tends to be quantitatively more important. Our results imply that taxation causes significant international debt spillovers through multinational banks, which has potentially important implications for tax policy.
Mr. Antonio Spilimbergo and Ms. Natasha X Che
Which structural reforms affect the speed the regional convergence within a country? We found that domestic financial development, trade/current account openness, better institutional infrastructure, and selected labor market reforms facilitate regional convergence. However, these reforms have mixed effects on the growth of regions closer to the country’s development frontier. We also document that regional income disparity and average income are inversely correlated across countries so that speeding up regional convergence increases national income. We also present a theoretical model to discuss these results.
International Monetary Fund
This note estimates potential output for France during 1980–2010, using three distinct approaches, and discusses long-term growth prospects. The focus on capital taxation highlights the need for a broader reform of the French tax system to address the features that hamper job growth, investment, and productivity growth. This paper analyzes the impact of Basel III capital requirements on French banks and the French economy, and proposes policy recommendations. French banks should be able to meet the new requirements through earnings retention.
Mr. James P. F. Gordon
Equity and efficiency justifications are found for the Community’s Structural Funds which are discovered to be carefully targeted at depressed regions, albeit with some horizontal inequities. If Fund transfers displace national assistance, then they may be misallocated by being tied to regional indicators. The recent doubling in size enhances the Funds’ ability to assist losers from the creation of a single European market in 1992. However, they fall short of constituting a safety net since they provide little automatic assistance to regions suffering negative shocks. Compensation of losers from the 1992 program would require an overhaul of the present allocation system, if not a further increase in scale.
International Monetary Fund
This paper compares the effective rates of taxation faced by a representative investor located in a major capital-exporting country for investments in machinery and buildings in nine capital-importing European countries. Poland and Hungary are found to have relatively high effective tax rates on equity-financed investment. The analysis suggests that both countries would benefit from streamlining capital cost recovery allowances and possibly lowering statutory corporate tax rates—as permitted by the revenue constraint—rather than providing tax preferences for foreign investors.