Tài liệu ADVANDCÉ IN TAXATION VOLUME 15 pdf

CONTENTS

LIST OF CONTRIBUTORS vii

EDITORIAL BOARD ix

AD HOC REVIEWERS xi

AIT STATEMENT OF PURPOSE xiii

THE EFFECT OF EXPORT TAX INCENTIVES ON EXPORT

VOLUME: THE DISC/FSC EVIDENCE

B. Anthony Billings, Gary A. McGill and Mbodja Mougoué 1

IMPLICATIONS OF BENCHMARK STATE AND LOCAL TAX

RATES FOR MEASURES OF ESTIMATED IMPLICIT TAXES

Bradley D. Childs 29

TAX ADMINISTRATION PROBLEMS: GAO-IDENTIFIED

SHORTCOMINGS AND IMPLICATIONS

Philip J. Harmelink, Thomas M. Porcano and

William M. VanDenburgh 43

IMPLICIT TAXES AND PROGRESSIVITY

Harvey J. Iglarsh and Ronald Gage Allan 93

THE ASSOCIATION OF CAREER STAGE AND GENDER

WITH TAX ACCOUNTANTS’ WORK ATTITUDES AND

BEHAVIORS

Suzanne Luttman, Linda Mittermaier and James Rebele 111

v

vi

THE DETERMINANTS OF STAFF ACCOUNTANTS’

SATISFACTION WITH SERVICES AT KOREAN DISTRICT

TAX OFFICES

Tae sup Shim 145

TAX POLICY EFFECTIVENESS AS MEASURED BY

RESPONSES TO LIMITS PLACED ON THE DEDUCTION OF

EXECUTIVE COMPENSATION

Toni Smith 173

LIST OF CONTRIBUTORS

Ronald Gage Allan Office of Student Financial Services, Georgetown

University, USA

B. Anthony Billings Department of Accounting, Wayne State

University, USA

Bradley D. Childs College of Business Administration, Belmont

University, USA

Philip J. Harmelink Department of Accounting, University of New

Orleans, USA

Harvey J. Iglarsh McDonough School of Business, Georgetown

University, USA

Suzanne Luttman Leavey School of Business, Santa Clara

University, USA

Gary A. McGill Fisher School of Accounting, University of

Florida, USA

Linda Mittermaier Accounting Department, Capital University, USA

Mbodja Mougou´e Department of Finance and Business Economics,

Wayne State University, USA

Thomas M. Porcano Department of Accountancy, Miami University,

USA

James Rebele Rauch Business Center, Lehigh University, USA

Tae sup Shim Department of Tax and Accounting, Incheon City

College, South Korea

vii

viii

Toni Smith Department of Accounting and Finance,

University of New Hampshire, USA

William M. VanDenburgh Department of Accounting, Louisiana State

University, USA

EDITORIAL BOARD

EDITOR

Thomas M. Porcano

Miami University

ASSOCIATE EDITOR

Charles E. Price

Auburn University

Kenneth Anderson

University of Tennessee, USA

Caroline K. Craig

Illinois State University, USA

Anthony P. Curatola

Drexel University, USA

Ted D. Englebrecht

Louisiana Tech University,

USA

Philip J. Harmelink

University of New Orleans,

USA

D. John Hasseldine

University of Nottingham,

England

Peggy A. Hite

Indiana University-Bloomington,

USA

Beth B. Kern

Indiana University-South Bend, USA

Suzanne M. Luttman

Santa Clara University, USA

Gary A. McGill

University of Florida, USA

Janet A. Meade

University of Houston, USA

Daniel P. Murphy

University of Tennessee, USA

Charles E. Price

Auburn University, USA

William A. Raabe

Ohio State University, USA

Michael L. Roberts

University of Alabama, USA

ix

x

David Ryan

Temple University, USA

Dan L. Schisler

East Carolina University, USA

Toby Stock

Ohio University, USA

AD HOC REVIEWERS

James R. Hasselback

Florida State University, USA

Ernest R. Larkins

Georgia State University, USA

Robert C. Ricketts

Texas Tech University, USA

Patrick J. Wilkie

George Mason University, USA

xi

STATEMENT OF PURPOSE

Advances in Taxation (AIT) is a refereed academic tax journal published annually.

Academic articles on any aspect of federal, state, local, or international taxation

will be considered. These include, but are not limited to, compliance, computer

usage, education, law, planning, and policy. Interdisciplinary research involving,

economics, finance, or other areas is also encouraged. Acceptable research

methods include any analytical, behavioral, descriptive, legal, quantitative,

survey, or theoretical approach appropriate for the project.

Manuscripts should be readable, relevant, and reliable. To be readable,

manuscripts must be understandable and concise. To be relevant, manuscripts must

be directly related to problems inherent in the system of taxation. To be reliable,

conclusions must follow logically from the evidence and arguments presented.

Sound research design and execution are critical for empirical studies. Reasonable

assumptions and logical development are essential for theoretical manuscripts.

AIT welcomes comments from readers.

Editorial correspondence pertaining to manuscripts should be forwarded to:

Professor Thomas M. Porcano

Department of Accountancy

Richard T. Farmer School of Business Administration

Miami University

Oxford, Ohio 45056

Phone: 513 529 6221

Fax: 513 529 4740

E-mail: [email protected]

Professor Thomas M. Porcano

Series Editor

xiii

THE EFFECT OF EXPORT TAX

INCENTIVES ON EXPORT VOLUME:

THE DISC/FSC EVIDENCE

B. Anthony Billings, Gary A. McGill

and Mbodja Mougoue´

ABSTRACT

This article examines the sensitivity of U.S. exports to the availability of

export incentives offered under the Domestic International Sales Corporation

(DISC) and the Foreign Sales Corporation (FSC) provisions of U.S. tax law.

Evidence on the efficacy of export tax incentives is mixed. The history of the

DISC/FSC tax incentives provides a natural experiment to address the ques￾tion of the effect of tax incentives on export volume. We examine the relation

of U.S. export volume to the availability of these export tax incentives from

1967 to 1998, controlling for product class and important macroeconomic

variables, and find evidence of a positive association between the level of

U.S. exports and the existence of the export incentives offered under the

DISC/FSC provisions. However, this association depends on product type.

Our findings using actual export data are independent of otherwise available

data demonstrating a general growth in the use of DISC/FSC entities and the

sales volume of these entities. The latter data suffer from an interpretation

problem because changes in the number of special export entities used and

their sales volume do not necessarily correlate with changes in actual export

levels over time. The approach we use in this study is an attempt to overcome

Advances in Taxation

Advances in Taxation, Volume 15, 1–28

© 2003 Published by Elsevier Ltd.

ISSN: 1058-7497/doi:10.1016/S1058-7497(03)15001-6

1

2 B. ANTHONY BILLINGS, GARY A. McGILL AND MBODJA MOUGOUE´

this limitation. The reported results have implications for both tax policy

regarding the design of export tax incentives and the European Union’s

claim that U.S. export tax incentives have damaged U.S. competitors in

foreign trade.

1. INTRODUCTION

Research suggests that national governments can help private industry increase its

global market share of products under imperfectly competitive market conditions.

The set of available governmental actions includes: (1) imposing tariffs on

imports; (2) funding technological innovation; (3) forming export cartels; and (4)

offering export incentives.1 This article examines the sensitivity of U.S. exports to

the availability of export incentives offered under the Domestic International Sales

Corporation (DISC) and the Foreign Sales Corporation (FSC) provisions of U.S.

tax law.

Evidence on the efficacy of export tax incentives is mixed. U.S. critics argue that

such provisions constitute an unwarranted tax benefit to U.S. exporters with little

or no real contribution to improving the U.S. balance of trade position. Conversely,

the European Union (EU) has long argued that these tax incentives represent an

illegal trade subsidy and that their existence has damaged U.S. competitors in

world trade. In the midst of this ongoing controversy regarding the influence of

export tax incentives, very little research has addressed the relation of these U.S.

tax incentives to actual export activity (as opposed to growth in the use of these

tax-favored export entities).2 The history of the DISC/FSC tax incentives provides

a natural experiment to address the question of the effect of tax incentives on

export volume.

We examine the relationship of U.S. export volume to the availability of these

export tax incentives for the time period 1967–1998, controlling for product class

and important macroeconomic variables. The results provide evidence on whether

U.S. tax policy has assisted the U.S. private sector in maintaining or increasing

its export market share. We find evidence of a positive association between the

level of U.S. exports and the existence of the export incentives offered under the

DISC/FSC provisions. However, this association depends on product type.

The remainder of this article is organized as follows. Section 2 provides an

overview of the DISC/FSC provisions and a review of the literature that provides a

framework for examining our research question. We define the research variables

in Section 3, describe the method of analysis in Section 4, and present the

results in Section 5. Section 6 provides sensitivity tests, and Section 7 concludes

the paper.

The Effect of Export Tax Incentives on Export Volume 3

2. BACKGROUND

2.1. DISC/FSC Provisions

In the late 1960s, the United States faced declining productivity for exported

staples and a concomitant deteriorating trend in its trade balance with major

trading partners. Numerous legislative proposals were introduced in the U.S.

Congress to deal with this eroding trade position. The DISC legislation eventually

became law in 1971, with the hope that this special tax benefit would stimulate the

export of U.S.-produced goods.3 The U.S. trading partners almost immediately

reacted negatively. To address the complaints filed by the General Agreement

on Tariffs and Trade (GATT), the DISC was essentially abandoned in 1984 and

replaced with the FSC regime.4 In 1999, the World Trade Organization (WTO),

the successor to the GATT, was successful in requiring that the United States

repeal the FSC provisions. In 2001, the U.S. Congress developed a replacement

for the FSC (the “extraterritorial income exclusion” regime) only to have this new

provision successfully challenged by the EU in 2001. By the end of 2002, the

United States faced a call to repeal the extraterritorial income exclusion regime.

The DISC was essentially a U.S. “paper” corporation serving as an alter ego

of its U.S.-related supplier or principal. The DISC granted tax-deferral privileges

to U.S. manufacturers that directly exported U.S.-produced goods. The DISC

incentive was intended to aid U.S. exporters competing with foreign exporters that

operated under a territorial system of taxation or a value added tax system (VAT).

As such, the DISC was structured specifically to address export incentives offered

by the U.S. trading partners. Congress intended that the export tax incentive would

increase exports of U.S.-produced products. In turn, the increased exports were

expected to produce: (1) increased employment in the affected U.S. industries;

(2) stabilization of the U.S. dollar against foreign currencies; and (3) increased

U.S. workers’ productivity.5 In this regard, the cost of the DISC program in terms

of lost tax revenue was considered a small price to pay for the achievement of the

aforementioned benefits.

Soon after the passage of the DISC legislation, several problems arose with

respect to its provisions. First, competing foreign countries argued that the DISC

incentives were an illegal export incentive under Article XVI of the GATT.

Second, some U.S. businesses and policy makers argued that the DISC provisions

favored large companies or specific types of industries and were merely a tax

shelter. Third, estimates of additional exports generated by the DISC incentives

varied widely.6 Fourth, the DISC legislation was met with disdain by EU members

that subsequently launched a formal request to GATT calling for the United

States to remedy alleged violations of GATT (Jackson, 1978). According to the

4 B. ANTHONY BILLINGS, GARY A. McGILL AND MBODJA MOUGOUE´

members, under Article XVI of GATT, a member contracting party such as the

United States is precluded from providing a tax incentive for exports without

granting a similar incentive to domestic sales (Jackson, 1978).7

In 1976, responding to the aforementioned concerns, the GATT Council

formally established a panel to evaluate the DISC with respect to Article XVI of

GATT. Although not yet committed to modifying the DISC on a significant basis,

in 1976 the United States altered the mechanism by which the tax benefit under

the DISC was calculated.8 However, this change appeared cosmetic to the EU

member countries and the GAAT Council. Consequently, in December 1981, the

GATT panel adopted an understanding, more akin to a compromise plan, stating

the following: (1) a country is not obligated to tax economic processes outside its

territorial waters; (2) member countries are permitted to adopt measures necessary

to avoid double taxation of foreign source income; and (3) an exporting company

should use an arms-length pricing method (World Trade Law, 1977).

The understanding essentially approved the territorial system used by EU

members partly because the territorial system provided only indirect tax incentives

rather than the direct export subsidy provided by the DISC provisions. In addition

to calling for changes in the DISC provisions, EU members called on the United

States to pay between $10 and $12 billion in compensation for lost revenues due

to the DISC.9

The United States committed in October 1982 to bring the DISC in conformity

with the GATT understanding.10 In March 1983, the Reagan Administration

approved the general outline of a proposal to replace the DISC, which died in

Committee. The proposal was, as expected, a territorial type of entity involved in

exporting U.S. goods. In this regard, the proposed FSC provisions were meant to

mirror the territorial tax system used by EU members.

The eventual FSC legislation required that the export entity be a foreign

corporation organized and registered under the laws of a foreign jurisdiction.11

The new FSC provisions failed to satisfy EU members who believed that the FSC

also offered an illegal export subsidy under GATT. Domestic critics continued to

argue that, like the DISC, the FSC represented merely a tax shelter for a small

number of U.S. companies rather than an export stimulus.

The EU’s displeasure with the FSC continued, and eventually the WTO’s

Dispute Settlement Body issued a final report in October 1999, finding that the

FSC regime violated the WTO’s Agreement on Subsidies and Countervailing

Measures. The report recommended that the FSC provisions be withdrawn by

October 1, 2000; the United States appealed the WTO’s ruling and lost (World

Trade Organization, 2000).

In response to the WTO ruling, Congress repealed the FSC provisions and as

a replacement for the FSC regime created an exclusion for certain extraterritorial

The Effect of Export Tax Incentives on Export Volume 5

income (ETI).12 This Act provided for the exclusion of certain qualifying foreign

trade income arising from qualified transactions that are conducted outside the

United States after September 30, 2000.13

The EU challenged the ETI Act on the basis that it was substantively a

repackaged version of the FSC rules, which were ruled as being in violation of

international trade laws. On August 20, 2001, the Dispute Settlement Panel of

the World Trade Organization ruled in favor of the EU claim based on two key

issues: (1) that the ETI regime constitutes an export-contingent subsidy; and (2)

that the ETI provisions do not grant the same tax benefits to U.S. sales as granted

to foreign sales. The United States appealed the decision, but the WTO Appellate

Body upheld EU claims that the ETI is an illegal export subsidy.

2.2. Research Framework

Research has demonstrated that export volume (both product amount and dollar

value) and relative market share for exports are sensitive to price changes arising

both from fluctuations in exchange rates and real price differences (Collie,

1991; Feenstra, 1986; Ohno, 1990; O’Neill & Ross, 1991). Other work provides

evidence that federal tax law changes affecting the cost of capital influence

product price and hence export volume (Campbell et al., 1987; Dutton, 1990;

Laussel, 1992; Rosson & Ford, 1982).

A number of studies have examined trade flows among nations within the

purview of the product life cycle model and the Hechscher-Ohlin international trade

model (Bilkey, 1982; Karlsson, 1988; Stadler, 1991; U.S. Department of Treasury,

1978). Under the product life cycle model, as a product’s life cycle matures,

patents expire and duplication/substitution product production becomes possible

in other countries. As a result, competitors in foreign countries may be able

to begin production of the product, resulting in stiff price competition for the

product (Dollar, 1987; Green & Lutz, 1978; Vernon, 1966). The Hechscher-Ohlin

international trade model is broader in scope and identifies economic variables

associated with imports and exports for products in individual countries. Eco￾nomic variables such as: (1) capital to labor ratio; (2) product life cycle; (3) R&D

intensity; (4) level of market imperfection; and (5) economies of scale on exports

traditionally are used to explain inter-country differences in exports and imports

(Schneeweis, 1985).

The empirical work based on these models suggests that the existence of market

imperfections, technological sophistication, existence of a patent for technology,

capital labor ratio, real price differences, and exchange rate fluctuations are

significant determinants of trade flows among nations. The primary mechanism

6 B. ANTHONY BILLINGS, GARY A. McGILL AND MBODJA MOUGOUE´

through which these factors operate is product price. Accordingly, to the extent

that the tax incentives offered under the DISC/FSC provisions alter producer

prices, we expect to see changes in export volume of U.S. products.

Prior research on the economic effects of DISC/FSC provisions has primarily

been limited to questionnaire studies administered to users of the DISC/FSC

vehicles (Bello & Williamson, 1985; Bilkey, 1982) or analytical analysis of

various aspects of the FSC provisions (Jacobs & Larkins, 1998). Several studies

have considered the sensitivity of export volume and market share to price changes

and to tax law changes (Dutton, 1990; Feenstra, 1986). Other related work has

investigated the specific economic factors associated with relative market share of

global sales for specific product categories (Brander & Spencer, 1983a; Dutton,

1990; Kim & Lyn, 1987; Laussel, 1992; Lee & Stone, 1994; Nolle, 1991; Rabino,

1989).

The studies reviewed here focus primarily on the sensitivity of export and

international markets to price differences arising from exchange rate fluctuations

and real price differences. These studies are relevant in the examination of the

effectiveness of the DISC/FSC incentives because the DISC/FSC incentives

theoretically affect the price of exports and thus the volume of exports.

Dutton (1990) analytically evaluated the effects of export subsidies under

situations where the monopoly power of the exporter is constrained for sales to

some countries and not to other countries. Dutton concluded that export subsidies

will occur most often where monopoly power is constrained on sales to countries

with a low elasticity of import demand and monopoly power is unconstrained to

other countries with a high elasticity of import demand. A low elasticity of export

supply also is shown to warrant export subsidies. Dutton argues for targeted

export subsidies on goods that would not otherwise be exported.

Likewise, Itoh and Kiyono (1987) investigated the effects of export subsidies on

goods that would not otherwise be exported. They conclude that export subsidies

on marginal goods increase the output of such goods and decrease the output of

non-marginal goods. More precisely, export subsidies are effective only on goods

that are normally exported in small quantities or not at all.

Rousslang (1987) investigated the economic impact of the Tax Reform Act

of 1986 (TRA, 1986)14 on international trade in disaggregated industries based

on the assumption that cost differences resulting from tax law changes were

passed on to consumers through price changes. He used a model developed by

the U.S. International Trade Commission to assess the economic impact of prior

significant tax changes and found that the tax law changes were reflected in the

cost of capital and, therefore, affected the ultimate price of the staple.15

Schneeweis (1985) sought to determine the economic determinants of imports

and exports in various business units for a number of industries. For this purpose,

The Effect of Export Tax Incentives on Export Volume 7

he used the Hechscher-Ohlin International Trade Model to identify the probable

economic variables associated with imports and exports of each country. He

regressed: (1) capital to labor ratio; (2) product life cycle; (3) R&D intensity;

(4) level of market imperfection; and (5) economies of scale on exports and

reported that the most significant determinants of exports were the level of market

imperfection and R&D intensity.

As an alternative to the Hechscher-Ohlin Model, Wells (1969) examined U.S.

exports of consumer durables to ascertain if certain economic patterns could be

identified within the purview of the Product Life Cycle model. Wells concluded

that the income elasticity of the consumers of the product, the ability to achieve

economies of scale, and the cost of transportation were significant factors in

determining the duration of the cycles and, therefore, global market share of the

initial producer of the product. A related conclusion was that the sophistication

of the applicable technology also determines the duration of the cycles.

In summary, the reviewed studies provide strong evidence that both international

market share and export volume are sensitive to price changes. The influence of

export subsidies is shown to be most effective on goods that would not otherwise

be exported without the export subsidy. The results of prior research suggest that

export tax incentives represent a viable way in which U.S. companies can remain

competitive in foreign markets as the life-cycle of a particular product matures.

The reviewed studies identified the following factors as significant determinants

of export volume: (1) size of exporter (Czinkota & Johnston, 1985); (2) R&D

intensity (Mansfield et al., 1979; Schneeweis, 1985); (3) capital intensity (Koo

& Martin, 1984); (4) export experience (Schneeweis, 1985); (5) perception of

long-term profitability (Goldstein & Mohsin, 1987; Rosson & Ford, 1982); (6)

export financing (Schneeweis, 1985); (7) stage in product life cycle (Hartzok,

1985; Schneeweis, 1985; Vernon, 1966; Wells, 1969); (8) tax law changes affect￾ing the cost of capital (Rousslang, 1987); (9) the level of market imperfection

(Schneeweis, 1985); and (10) value added per employee (Schneeweis, 1985).

3. VARIABLES

This study addresses the effect of the DISC/FSC tax regimes on exports by

regressing quarterly export volume data (aggregate and separately by product

type) on various versions of the DISC/FSC tax regimes while controlling for con￾current variation in important macroeconomic variables. We examine the period

beginning with the first quarter of 1967 and ending with the third quarter of 1998.

The dependent variable (EXPORT), the volume of export product in U.S.

dollars, represents the level of product exported from the United States.16 Export