The Impact of Societal Demands for Tax Symmetry

Figure 5 allows comparing the conditional impact of equality needs enrooted in society on effective tax rates, their ratio and top corporate rates.

Societal demands for tax symmetry exert a strong positive effect on effective capital taxation (figure 5a); the more governments are forced by the electorate to redistribute from richer parts of the society to poorer, the higher the capital tax rates. The lines for low, medium and high tax environments are relatively far apart indicating that other factors – domestic and international – have a strong influence on the level of capital taxation as well. Labour taxes in comparison decline with societal demands for tax symmetry, even though governments become less willing or able to push labour taxes far down (figure 5d). Figure 5d displays the tax system effects of equity needs, graphically supporting this fact. Societal equality demands strongly impact tax symmetry: the more important equality and justice become in a society, the closer grow tax burdens on the mobile and immobile factor. Only in case equity needs take on the maximal value and all other factors (budget rigidities, competitive pressures, and the de facto mobility of domestic capital) support high tax symmetry the tax ratio approaches 1, so that labour and capital tax rates converge. If other variables allow governments to engage in tax competition and increase the tax burden on wage income at the same time, e.g. a high share of domestic mobile capital and low budget rigidities, the tax asymmetry is relatively high (75^th percentile line in figure 5d) but still strongly decreases with the strength of societal demands for equal taxation and redistribution.

Marginal corporate tax rates react heavily to symmetry considerations (figure 5c). The lines steeply slope upwards; the stronger the equality

expectations of voters, the higher are the marginal corporate rates implemented by governments. It seems that statutory rates serve not only as signal for foreign capital owners, but policy makers also use statutory rates to signal to their domestic electorate that they take their demands for equality seriously. Statutory corporate rates can be cut back or pushed up without substantially changing the effective tax burden on capital because decision makers can simultaneously broaden the tax base or grant tax concessions.

In general, voters' expectations with respect to tax symmetry strongly impact governments' decisions concerning the domestic tax system. The majority of the electorate is unwilling to bear the costs of tax competition and subsidize capital owners. The more voters care about tax symmetry, the more policy makers adapt their tax policy to this societal demand in order to prevent the decline of electoral support.

Figure 5: The Conditional Influence of Societal Equality Needs

-0.2 -0.1 0.0 0.1 0.2 0.3

10 15 20 25 30 35 40 45

other variables p75 values

other variables median values

AETR on capital

absolute fiscal redistribution other variables p25 values

Figure 5a: AETR on capital

-0.2 -0.1 0.0 0.1 0.2 0.3

10 15 20 25 30 35 40 45

other variables p75 values other variables median values other variables p25 values

AETR on labour

absolute fiscal redistribution

Figure 5b: AETR on labour

-0.2 -0.1 0.0 0.1 0.2 0.3 10

15 20 25 30 35 40

other variables p75 values other variables median values

other variables p25 values

marginal corporate tax rate

absolute fiscal redistribution

Figure 5c: Marginal corporate tax rates

-0.2 -0.1 0.0 0.1 0.2 0.3

0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2

other variables p75 values

other variables m

edian values other variables p

25 values

tax ratio: AETR on labour/AETR on capital

absolute fiscal redistribution

Figure 5d: Tax ratio

3.1.3.3 De Facto Capital Mobility

Figure 6 depicts the conditional effect of average de facto capital mobility in an economy. Since effective labour taxation does not react significantly to the domestic capital structure (table 11) I do not provide a graphical account for this relationship. Both effective capital rates and marginal corporate rates heavily depend on the share of highly mobile capital in the domestic economy (figures 6a,c). The more multinationals and FDI dominate the domestic economy, the higher the actual ability of capital owners to move assets to low-tax jurisdictions, and the lower both the effective tax burden on the mobile factor and the statutory rate on corporate income. Fiscal authorities are not only concerned with attracting foreign capital but more so with keeping multinationals from shifting their capital and paying taxes elsewhere. Yet, governments have more latitude for adapting efficient rates which range between 2 and 40 percent than to change marginal rates ranging between 20 and 42 percent. Seemingly, statutory corporate rates serve governments mainly to send signals to capital owners abroad.

Multinationals and FDI located in the home country care more about the effective tax burden imposed by the domestic government.

As effective capital tax rates react heavily to the share of multinationals in the domestic economy, the ownership structure of domestic capital affects tax symmetry as well. To the same degree capital taxation decreases with the share of highly mobile capital, tax asymmetry increases because labour tax rates are not cut back accordingly. Hence, if a domestic economy faces high de facto capital mobility because it is dominated by multinationals and their subsidiaries, tax equity declines sharply. Policy makers have to provide favourable conditions for highly mobile capital in order to avoid capital

arbitrage and loss of revenue. In addition, a higher capital to labour ratio boosts productivity of labour resulting in higher wages and higher tax revenue from the immobile base.

Figure 6: The Conditional Influence of the Share of Highly Mobile Capital

0 200 400 600 800 1000 1200 1400

5 10 15 20 25 30 35 40

other variable

s p75 values

other variables media n values other variable

s p25 values

AETR on capital

FDI stock in 1000 (t-1)

Figure 6a: AETR on capital

0 200 400 600 800 1000 1200 1400

ariables p75 values other v

ariables median values other v

ariables p25 values

marginal corporate tax rate

FDI stock in 1000 (t-1)

Figure 6c: Marginal corporate rates

0 200 400 600 800 1000 1200 1400

0.8

tax ratio: AETR on labour/AETR on capital

Figure 6d: Tax ratio