American Taxation Association

JATA abstracts - Spring 1999

JATA - Spring 1999

Volume 21, No. 1

MAIN ARTICLES

An Application of the Scholes and Wolfson Model to Examine the Relation Between Implicit and Explicit Taxes and Firm Market Structure
Debra S. Callihan and Richard A. White

Reward Dominance in Tax Reporting Experiments: The Role of Context
Martha L. Wartick, Silvia A. Madeo, and Cynthia C. Vines

RESEARCH NOTES

A Re-Examination of the Effects of Personal Deductions, Tax Credits, and the Tax Rate Schedule on Income Tax Progressivity and Income Inequality
James C. Young, Sarah E. Nutter, and Patrick J. Wilkie

Implications of Phase-Outs on Individual Marginal Tax Rates
Charles R.Enis and Leroy F. Christ

EDUCATORS' FORUM

Integrating Multijurisdictional Issues into the Introductory Tax Courses
Michael S. Schadewald


An Application of the Scholes and Wolfson Model to Examine the Relation Between Implicit and Explicit Taxes and Firm Market Structure

Debra S. Callihan and Richard A. White

Abstract

A taxpayer can take advantage of preferential tax provisions to lower its explicit tax burden. In the absence of market frictions, this differential tax treatment gives rise to differences in pre-tax returns across investments, defined as an implicit tax (Scholes and Wolfson 1992). Market structures that are other than perfectly competitive can impede the realization of implicit taxes (which represent lower pre-tax returns) by allowing firms to earn extra-normal after-tax returns (Wilkie, 1992). This study estimates implicit tax rates and investigates the relation between a firmís implicit tax rate and two factors: 1) the pre-tax of return, and, 2) the potential market power of the firm, which could provide the opportunity to shift implicit (and explicit) tax burdens from the firm to consumers or labor. The results indicate that implicit taxes are significantly negatively related to the pre-tax rate of return and firm market structure characteristics. The interaction of pre-tax returns and firm market structure characteristics is positively related to implicit taxes, indicating that firm market structure leads to a weakening of the strict negative relation between implicit taxes and pre-tax returns. Top


Reward Dominance in Tax Reporting Experiments: The Role of Context

Martha L. Wartick, Silvia A. Madeo, and Cynthia C. Vines

Abstract

During the past decade, the experimental economics method increasingly has been used to study the impact of tax policy on taxpayer behavior. Experimental economics in taxation typically tests tax applications of expected utility and psychological theory by creating a real microeconomy in the laboratory. A key requirement is strict control over the parameters of the experimental setting and subject preferences. One generally accepted procedure to achieve experimental control is to avoid references to real world phenomena in instructions to subjects. The reasoning underlying this procedure is that if subjects associate the experiment with real world phenomena, they may make decisions based on values associated with the real world context instead of the rewards and penalties of the microeconomy. Despite this, several recent tax reporting experiments that otherwise conform to the experimental economics method have used explicit tax terminology. In discussing the results of these experiments, the authors and commentators stated that the results probably were not affected by the tax context.

We conducted an experiment to further examine whether the results of a tax reporting experiment were affected by context. We found that subjects reported significantly more income when the context of the experiment was tax than when the context was non-tax. This effect differed, however, depending on the age of the subjects. While subjects 25 years of age and older reported approximately twice as much income in the tax context as they did in the non-tax context, subjects under 25 reported only slightly more in the tax context than in the non-tax context. These results provide evidence that role playing based on individual subject characteristics occurred when contextual cues were provided. Top


A Re-Examination of the Effects of Personal Deductions, Tax Credits, and the Tax Rate Schedule on Income Tax Progressivity and Income Inequality

 James C. Young, Sarah E. Nutter, and Patrick J. Wilkie

Abstract

We refine and extend Seetharaman (1994) using tax return level Statistics of Income data that represent the population of 1992 federal individual income tax returns. Our result indicate that while the standard deduction, exemptions, and tax rate schedule continue to contribute the most to progressivity, the rate schedule plays a much greater role (and the standard deduction and exemptions a much lesser role) than previously reported. In addition, consistent with Dunbar (1996), we find that tax credits, in particular the earned income credit, have a substantial effect on overall tax progressivity. Although itemized deductions continue to reduce overall progressivity, with housing costs (mortgage interest and real estate taxes) and state and local income tax deductions being the dominant items, our results indicate that their effect on tax progressivity is smaller than indicated in the earlier study. Finally, we find that the effect of the income tax system on income inequality is more pronounced than previously reported, especially when the data are partitioned by filing status. Top


Implications of Phase-Outs on Individual Marginal Tax Rates

Charles R.Enis and Leroy F. Christ

 Abstract

The goal of this paper is to show the behavior of effective marginal tax rates relative to statutory marginal tax rates within the rate structure of the present Federal income tax regime. Understanding the behavior of effective marginal rates is important as these rates are a significant component of tax planning and decision-making. Statutory marginal tax rates are explicitly stated in published rate schedules. Various deductions, exemptions, and credits involved in determining the tax liability are phased-out as gross income increases. These restrictions result in effective marginal tax rates that can exceed respective statutory rates. Substantial divergence between effective and statutory rates can occur when multiple phase-out provisions overlap and interact. This study develops an algebraic model using tax return information that converts statutory to effective marginal rates. Policy implications concerning simplifying the effective rate structure are also discussed. Top


Integrating Multijurisdictional Issues into the Introductory Tax Courses

Michael S. Schadewald

Abstract

Tax educators are recognizing the increased importance of international and multistate tax issues in accounting practice, and the corresponding need to introduce accounting students to the basic principles of multijurisdictional taxation. Obstacles to greater coverage of multijurisdictional issues in the introductory tax courses include not only the significant time constraints that instructors face in these courses, but also a lack of instructional resources and experience needed to effectively teach these topics. This paper is designed to help tax educators overcome these obstacle by identifying the appropriate multijusidictional learning objectives for the introductory tax courses, summarizing available instructional resources, and providing sample teaching materials that can be used to teach these topics. Top

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