New room to maneuver? National tax policy under increasing financial transparency

Abstract

Why have Organisation for Economic Co-operation and Development (OECD) governments raised taxes on dividends at the shareholder level since 2008? Previous research points to the importance of budget deficits and voter demand for compensatory fairness in the aftermath of the financial crisis. We complement this literature by showing that the effect of domestic drivers of tax increases on capital income crucially depends on the level of financial transparency in a country’s investment network. Low financial transparency increases the risk of capital flight in response to a tax hike, whereas high financial transparency reduces this risk. Hence, governments facing fiscal pressure become more likely to raise taxes on capital income when transparency is high. To substantiate our argument, we construct an original indicator of financial transparency in countries’ investment networks, which we utilize in a regression analysis of tax reforms by 204 cabinets in 35 OECD countries between 2001 and 2018.

Capital Taxation and International Cooperation

“…Therefore, our second empirical strategy aimed at investigating the variation across countries in more detail. In Ahrens et al (2020a), and in line with the general theoretical model presented above, we argue that the variation in countries' reactions to increased transparency depends on domestic factors. Transparency alone is not sufficient to motivate governments to increase tax rates.…”

Tax Evasion and Inequality

“…In Denmark and Norway, the tax authorities, after detailed investigations, found that 90 to 95 percent of all HSBC account-holders had failed to report the income earned on their account (and the wealth held there in the case of Norway, where a wealth tax exists) and were thus evading taxes. 11 This result is consistent with a body of evidence suggesting that more than 90 percent of Swiss accounts were undeclared around 2007; this includes two US Senate (2008, 2014) reports finding that 85-95 percent of US-owned accounts at UBS and Credit Suisse were undeclared in 2007-2008, Roussille (2015) who estimates that more than 90 percent of the wealth held by Europeans in Switzerland was undeclared before 2010, and Johannesen and Zucman (2014) who obtain a similar estimate.…”

“…In addition, according to the ICI J, the biggest account at HSBC Switzerland was a US $11.9 billion account registered in the name of Venezuela's National Treasurer (who started off as a bodyguard for the late Venezuelan President Hugo Chávez). 11 This does not imply that all taxpayers with undeclared HSBC accounts have been convicted of tax evasion. In prosecuting the cases, the tax authorities face constraints.…”

“…HSBC Evaders, Panama Papers Individuals, and Amnesty Participants, by Wealth Group Columns 1,5,7,and 11 show the fraction of all households who evaded taxes at HSBC Switzerland, who are in the Panama Papers, or who used a tax amnesty to voluntarily disclose hidden wealth, by wealth group. For HSBC, our sample pools Norwegian, Swedish, and Danish households; therefore wealth groups are defined relative to Scandinavia as a whole (Norway, Sweden, plus Denmark).…”

Is neoliberalism still spreading? The impact of international cooperation on capital taxation

“…As discussed in part 4, our identification strategy aims at isolating the average effect of international tax cooperation on tax rates imposed on dividends. In a companion paper (Ahrens et al, 2020), we investigate the empirical interaction between fiscal transparency and the domestic factors to also explain tax rate variation across countries.…”