Fiscal Studies, June 2007

Published on 4 June 2007

<h3> Distributional Implications of Tax Relief on Voluntary Private Pensions in Spain</h3> Author and contact: Jose-Ignacio Anton, Universidad de Salamanca, <a href="mailto: [email protected]">[email protected]</a> Using taxation statistics, this paper explores the distributional implications of tax relief on private pensions in Spain in 2002. For this purpose, the author suggests a decomposition of the Kakwani index and its generalisations that allows us to distinguish between the regressivity caused by targeting and that due to benefits allocation among recipients. This paper finds that these tax incentives are regressive, mainly for the latter reason, and have negative although small distributional effects. Finally, this work presents several proposals for reform of the current system and simulates their implications for equity. <h3> Understanding Pensions: Cognitive Function, Numerical Ability and Retirement Saving </h3> Authors: James Banks, UCL and IFS <a href="mailto:[email protected]">[email protected]</a> and Zoe Oldfield, IFS, <a href="mailto:[email protected]">[email protected]</a> Contact: IFS Press Office, 020 7291 4800 As the degree to which individuals are expected to provide their own resources for retirement increases, there is an increasing importance of individuals being able to understand the financial choices they face and to choose savings products, portfolios and contribution rates accordingly. In this paper, we look at numerical ability and other dimensions of cognitive function in a sample of older adults in England and examine the extent to which these abilities are correlated with various measures of wealth and retirement saving outcomes. As well as finding that relatively large fractions of the older population can be seen to have low levels of numeracy, we show that individuals with higher numeracy are more likely to own private pensions and to invest in risky assets even when controlling for other dimensions of cognitive ability as well as educational attainment. Higher levels of numeracy are also associated with better understanding of private pension arrangements, and with greater perceived financial security. In the short term, one policy goal might be to improve the type and amount of information and education available about pensions and other financial products. The government's "financial capability" agenda has explicitly targeted improvements in this area. The findings in this report suggest that it would be appropriate to focus this agenda at low-numeracy, low-education groups. A longer-run goal for retirement saving policy might be to try to improve numeracy levels more generally. <h3> Business Optimism for Small, Medium and Large Firms: Does It Explain Investment?</h3> Author and contact: Ciaran Driver, Imperial College, <a href="mailto: [email protected]"> [email protected]</a> We use UK survey data on variation in business optimism by manufacturing size group to estimate the determinants of optimism using OLS and SURE. There are similarities across the size groups but also some differences: the medium-size group seems to have been unusually affected by real interest rates in recent years. We also model investment authorisations, conditional on business optimism. Again, there are similarities across the size groups. However, the largest-size group, and possibly also the medium-size group, seem to be investing less in recent years in relation to reported optimism. By contrast, capital investment by smaller-sized firms has been stable in relation to business optimism. Some tentative explanations for these findings are explored. <h3> Determinants of Bilateral Effective Tax Rates: Empirical Evidence from OECD Countries </h3> Author and contact: Simon Loretz, University of Innsbruck <a href="mailto: [email protected]">[email protected]</a> This paper identifies the relevant determinants of a company's effective tax burden. Thereby, we account for bilateral aspects of corporate taxation by calculating bilateral effective tax rates as proposed by Devereux and Griffith (1999 and 2003). The empirical evidence of a large panel of nearly 8,000 bilateral effective tax rates within the OECD suggests that country size is an important determinant of the effective tax rate. In line with the literature, bilateral tax rates with small host countries exhibit a smaller overall effective tax rate, despite the fact that larger countries are more likely to reduce the tax burden by means of tax treaties at the bilateral level. Further, we find that geographically remote countries impose higher taxes, whereas economic integration tends to reduce the extent of the bilateral effective tax burden. <h3> Making the Stability Pact More Flexible: Does It Lead to Pro-Cyclical Fiscal Policies? </h3> Author and contact: Michal Mackiewicz, University of Lodz <a href="mailto: [email protected]">[email protected]</a> One of the often-discussed negative aspects of the Stability and Growth Pact is the rigidity of its deficit rule. Several reform proposals aim currently to alleviate the rule in order to allow the automatic stabilisers to operate freely. However, such a reform is likely to cause even further deterioration of fiscal balances in the EMU member countries. The empirical evidence presented in this paper shows that, in the past, increasing the structural deficit had a strong negative impact on the degree of anti-cyclical fiscal stabilisation. This suggests that the reform of the Pact, through higher structural deficits, could decrease rather than increase the scope of anti-cyclical fiscal actions in the EMU member countries. <table width="100%"> <tr> <td class="green" valign="top"> Ends <img src="/images/end_sq.gif" width=15 height=13 border=0></td> </tr> </table> <h3>Notes to Editors</h3> <ol> <li>The June issue, Vol. 28, No. 2, of Fiscal Studies is published today, 4th June 2007. For press copies, contact the press office at IFS, 020 7291 4800. <li>Fiscal Studies is a peer-reviewed journal and the articles published do not reflect the views of the editors or of the Institute for Fiscal Studies, which has no corporate views. For information about the articles summarised above, please contact the authors listed. </ol>

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