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Three essays on the taxonometrics of labor income [Elektronische Ressource] / vorgelegt von Martin Frederik Weiss

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155 pages
Three Essays on the Taxonometrics of LaborIncomeInaugural-Dissertationzur Erlangung des Doktorgradesder Wirtschaftswissenschaftlichen Fakultätder Eberhard-Karls-Universität zu Tübingenvorgelegt vonMartin Frederik Weissaus Heidelberg2010Dekanin: Professorin Dr. Kerstin PullErstkorrektor: Professor Dr. Dr. h.c. Franz W. WagnerZweitkorrektorin: Professorin Dr. Kerstin PullTag der mündlichen Prüfung: 14.7.2010PREFACEThis thesis was accepted by the Faculty of Economics and Business Administrationof the Eberhard-Karls-Universität Tübingen in July 2010. The contributions assem-bled here were written during my time as an assistant to Prof. Dr. Dr. h.c Franz W.Wagner from April 2006.Issues concerning the taxation of labor income are a neglected area of research inBusiness Administration. One of the main pillars of the German tax system is thetaxation of wages which consistently rakes in over 80% of income tax rev-enue. Given this significance, the lack of research in this area is both surprising andastonishing. In this doctoral thesis, I provide three attempts to illuminate three as-pects of labor taxation. As a “bonus”, I also present a contribution to the taxation ofcapital income which was written in collaboration with my colleague Martin Jacoband Prof. Rainer Niemann.I want to thank first and foremost Prof. Dr. Dr. h.c. Franz W. Wagner for his pa-tience and encouragement along the way, and for the inspiration he provided.
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Three Essays on the Taxonometrics of Labor
Income
Inaugural-Dissertation
zur Erlangung des Doktorgrades
der Wirtschaftswissenschaftlichen Fakultät
der Eberhard-Karls-Universität zu Tübingen
vorgelegt von
Martin Frederik Weiss
aus Heidelberg
2010Dekanin: Professorin Dr. Kerstin Pull
Erstkorrektor: Professor Dr. Dr. h.c. Franz W. Wagner
Zweitkorrektorin: Professorin Dr. Kerstin Pull
Tag der mündlichen Prüfung: 14.7.2010PREFACE
This thesis was accepted by the Faculty of Economics and Business Administration
of the Eberhard-Karls-Universität Tübingen in July 2010. The contributions assem-
bled here were written during my time as an assistant to Prof. Dr. Dr. h.c Franz W.
Wagner from April 2006.
Issues concerning the taxation of labor income are a neglected area of research in
Business Administration. One of the main pillars of the German tax system is the
taxation of wages which consistently rakes in over 80% of income tax rev-
enue. Given this significance, the lack of research in this area is both surprising and
astonishing. In this doctoral thesis, I provide three attempts to illuminate three as-
pects of labor taxation. As a “bonus”, I also present a contribution to the taxation of
capital income which was written in collaboration with my colleague Martin Jacob
and Prof. Rainer Niemann.
I want to thank first and foremost Prof. Dr. Dr. h.c. Franz W. Wagner for his pa-
tience and encouragement along the way, and for the inspiration he provided. Spe-
cial thanks are also due to Prof. Dr. Kerstin Pull for the second report on my thesis
and for her course on scientific publishing during the Winter Semester 2006/2007.
I also want to express my gratitude to my colleagues at the chair of Business Taxa-
tion: Martin Jacob, Michaela Ott, Andreas Pasedag and Jan Vossmerbäumer.Contribution 2 profited from comments provided by participants at the fourth arqus
conference at Bielefeld, July 2008. Contribution 3 owes much to comments by par-
ticipants at the conference on “Empirical Research for the Tax Profession”, at the
ZEW Mannheim, September 2009.
Last, but by no means least, I want to express my gratitude to my family and friends
who have supported me along the way. Without them, this thesis would not have
been written.
Tübingen, July 2010 Martin Frederik WeissOVERVIEW
List of Tables I
List of Figures III
Introduction 1
1 Higher Tax Rates on Labor? Evidence from German Panel Data 9
2 Training Decisions and the Income Tax 29
3 Do Germans React to the Commuting Allowance? 63
4 The Rich Demystified: A Reply to Bach, Corneo and Steiner (2008) 85
Bibliography 127
Index 141CONTENTS
List of Tables I
List of Figures III
Introduction 1
1 Higher Tax Rates on Labor? Evidence from German Panel Data 9
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.2 Estimation of the Wage Equation . . . . . . . . . . . . . . . . . . . 13
1.2.1 Estimation Strategy . . . . . . . . . . . . . . . . . . . . . . 13
1.2.2 Dataset . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.2.3 Estimation Results . . . . . . . . . . . . . . . . . . . . . . 17
1.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2 Training Decisions and the Income Tax 29
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.2 Training Decisions under an Income Tax . . . . . . . . . . . . . . . 33
2.2.1 Tax Effects for Training Decisions . . . . . . . . . . . . . . 33
2.2.2 Relevant Provisions of the German Income Tax Code 2003 . 39
2.3 Empirical Returns to Training . . . . . . . . . . . . . . . . . . . . 41
2.3.1 Research Goal . . . . . . . . . . . . . . . . . . . . . . . . 41
2.3.2 Econometric Specification . . . . . . . . . . . . . . . . . . 422.3.3 The Dataset . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2.3.4 Estimation Results . . . . . . . . . . . . . . . . . . . . . . 49
2.4 Tax Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
2.4.1 Description of the Approach . . . . . . . . . . . . . . . . . 52
2.4.2 Example for the Calculations . . . . . . . . . . . . . . . . . 54
2.4.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Appendix: The Duan Method . . . . . . . . . . . . . . . . . . . . . . . . 60
3 Do Germans React to the Commuting Allowance? 63
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3.2 The Commuting Allowance . . . . . . . . . . . . . . . . . . . . . . 69
3.2.1 Legal Design of the Allowance . . . . . . . . . . . . . . . . 69
3.2.2 Theoretical Research . . . . . . . . . . . . . . . . . . . . . 71
3.3 Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
3.3.1 Estimation Strategy . . . . . . . . . . . . . . . . . . . . . . 73
3.3.2 Dataset . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
3.3.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
4 The Rich Demystified: A Reply to Bach, Corneo and Steiner (2008) 85
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
4.2 Theoretical Examination of the Approach in Bach et al. (2008) . . . 88
4.2.1 The BCS Approach . . . . . . . . . . . . . . . . . . . . . . 88
4.2.2 Effective Tax Rates . . . . . . . . . . . . . . . . . . . . . . 89
4.2.3 Different Notions of Income . . . . . . . . . . . . . . . . . 91
4.2.4 The Relation between Economic Income and Taxable Income 93
4.2.5 The Tax Burden on Activities . . . . . . . . . . . 95
4.3 Analysis of Effective Tax Rates on Top Incomes . . . . . . . . . . . 105
4.3.1 Description of Available Datasets . . . . . . . . . . . . . . 105
4.3.2 “Adjusted Gross Income” Variable in BCS . . . . . . . . . 108
4.3.3 Adjustment for Taxes Paid . . . . . . . . . . . . . . . . . . 113
4.3.4 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . 116
4.3.5 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . 117
4.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118Appendix: Additional Tables . . . . . . . . . . . . . . . . . . . . . . . . 119
Bibliography 127
Index 141LIST OF TABLES
1.1 Tax Rates in the Nordic Countries (in %) . . . . . . . . . . . . . . . 10
1.2 Cohort Strengths in the Dataset . . . . . . . . . . . . . . . . . . . . 16
1.3 Conversion of Degrees into Imputed Educational TimesS (in Years) 17i
1.4 Estimation Results for Equation (1.1) . . . . . . . . . . . . . . . . 18
1.5 Required Marginal Tax Rates t under the Nielsen and Sørensen-2
Model, for Varying Interest Rates i, Tax Rates t and Thresholds1

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.1 Estimation Results for the OLS vs. Treatment Regression . . . . . . 50
2.2 Time Line for Example . . . . . . . . . . . . . . . . . . . . . . . . 55
3.1 Historical Development of the German Commuting Allowance 2001-
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
3.2 Wage Income and Deductions in German Income Tax Returns for
the Year 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
3.3 Sample Characteristics . . . . . . . . . . . . . . . . . . . . . . . . 80
3.4 Difference-in-Difference Estimation for the Commuting Distances . 81
4.1 Differing Income Definitions . . . . . . . . . . . . . . . . . . . . . 91
4.2 Derivation of the Cash Flow . . . . . . . . . . . . . . . . . . . . . 92
4.3 Comparison of Single Period ETRs . . . . . . . . . . . . . . . . . . 93
4.4 Calculation of Tax Liability for an Unincorporated Business . . . . 97
IList of Tables
4.5 Calculation of Tax Liability for an Incorporated Business under the
German Full-Imputation System and the German Half-Income Sys-
tem, Owners in the Highest German Tax Bracket . . . . . . . . . . 100
4.6 The Effect of Intertemporal Offsets on the ETR . . . . . . . . . . . 103
4.7 Definition of Adjusted Gross Income . . . . . . . . . . . . . . . . . 108
4.8 Adjustments to Recognized Tax Burden . . . . . . . . . . . . . . . 113
BCS4.9 Comparison of the Comprehensive Nominal Tax Rate andETR
for 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
4.10 Adjusted Income Components as Percentage of Adjusted Sum of
Incomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
4.11 Distribution of Adjusted Income Components among Quantiles . . . 121
4.12 Relevance of Intertemporal Loss Deductions . . . . . . . . . . . . . 122
4.13 Reporting Frequency of Income Components . . . . . . . . . . . . 123
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