Three Essays on Business Taxation
Date
2019-07-02
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Abstract
This thesis contains three essays on the design of business income taxation and its effects on labor market outcomes. Given the existence of informal sector activities, especially in developing countries, and the highly regressive nature of the fixed costs of registering and complying with taxation, the first two chapters, provide theoretical frameworks for designing welfare-maximizing tax systems in countries where informal activities are pervasive. The third chapter studies the causal effects of corporate income tax on wages and hours of employment using the 2001-2004 federal tax reform in Canada as a natural quasi-experiment. In Chapter 1, we construct a simple model where a turnover threshold separates firms paying standard corporate income tax from firms (below the threshold) who pay a tax on their sales (turnover). Thus, closed-form solutions are derived for the optimal threshold, in terms of the standard corporate income tax rate and the turnover tax rate; and closed-form solutions are derived for the optimal turnover tax rate as a function of the threshold. Chapter 2 extends the simple model from Chapter 1 by endogenizing firms' sales levels through their input choices. We analyze a model where entrepreneurs allocate labor to the formal and informal sectors. Formal sector income is subjected either to a corporate income tax or a tax on turnover, depending on whether their turnover exceeds a threshold. Given private behavior, social welfare is optimized. We interpret the first-order conditions for welfare maximization to identify the key margins and then simulate a calibrated version of the model. Chapter 3 studies the labor market effects of the corporate income tax by exploiting a 2001-2004 federal tax reform in Canada. This reform lowered the federal statutory corporate income tax rate by 25% (i.e., from 28% to 21%) in the sectors which were not previously under special tax treatment. Results from difference-in-differences regressions suggest that workers benefited significantly from tax reduction. Consistent with Griliches' capital-skill complementary hypothesis, this paper finds that high-educated workers benefited more from the reform compared with medium-educated or low-educated workers.
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Keywords
turnover tax, threshold, corporate income tax, tax compliance, informal sector
Citation
Wei. F. (2019). Three Essays on Business Taxation (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca.