What is the effect on supply when there is a improvement in technology and increase in excise tax?

The pandemic helped push corporate tax departments to increase their level of automation, raising their efficiency and effectiveness within their organizations

Automation has been cited as one of the innovations that has rescued most corporate tax departments over the last two years. Unfortunately, most automation was unplanned, as it was a necessary solution to being able to work over the previous two years.

Moving to automation didn’t just come about during the pandemic, however; according to the Brookings Institute, automation has assisted the way we work for more than the past 30 years, with businesses adding more automation after each recession in anticipation of staff attrition. It’s now hard to remember that the computer and internet has automated what tax professionals used to do with only a calculator.

Now, as businesses and their workers must again get used to the new way in which work is performed, businesses are faced with renewed focus on process and automation in order to build upon what has been started and respond to the Great Reshuffle. In addition, the increased need for the correct governance to comply with the continually changing national and international tax regulations. For example, the updates to the trade and transfer tax rules under the Organisation for Economic Co-operation and Development (OECD) and the Superfund Excise Tax alone are a strong motivation for increased technology and automation.

Corporate tax departments, like most enterprises, have “a pretty good idea” of their business processes and desired outcomes. However, having an idea isn’t enough. Business processes must be thoroughly thought out with the idea of how it should be customized to the department. A business process or workflow must include at a minimum the following steps:

- - events and activities that occur within a workflow;
  - the owner or initiator of those events and activities;
  - decision points and the different paths workflows can take based on their outcomes;
  - devices involved in the process;
  - timelines of the overall process and each step in the process; and
  - success and failure rates of the process.

The tax department team can create the business process model before working with IT on the creation of the business process itself, allowing for clarity and the ability to fine-tune what technologies and systems should be employed for automation. Having the business process as the roadmap to automation doesn’t mean perfect is the immediate outcome. To be thoughtful and thorough requires fine-tuning to get to where the team needs to be, and so below are some considerations department leaders need to think about when automating their tax department successfully.

1. Start with the basics, the beginning of what the tax function’s operational role is within the organization — According to a KPMG’s Global Tax Benchmarking report, most tax departments are responsible for such task as: i) tax returns and compliance; ii) business unit support and consulting; iii) transaction taxes; iv) accounting for income taxes; and v) transfer pricing. In addition, the report highlights that “the most effective, highly valued tax departments are those that manage tax risk and compliance while identifying opportunities for adding value through core tax management skills.” This may seem obvious, but clarifying and reclarifying the role of the tax team in how it supports the overall organization is the foundation of what the department should do. Focusing on this will help determine what areas can and should be automated; and this is especially true as leaders consider what tasks needs to be automated so that resources can be freed up for other opportunities.

2. After identifying areas where automation is needed, clearly state the expected outcomes from the implementation of automation — Again, it is a seemingly simple step that is often overlooked, yet ignoring it could lead to failure to adapt to the new process or early abandonment of a new innovation because people believe it isn’t working. Many organizations begin their automation journey by setting a broad mission to drive productivity across the business, hoping it will lead to cost savings or some other miracle savings, such as in time or other resources. It is necessary, not critical, that those involved in the automation decisions state their expectation of what the automation will solve and then establish a timeline for that outcome.

3. Who will do what? Understanding the current skillset and bandwidth of your team — Another common mistake is believing everyone on the team needs to be trained on the new technology. Unless it truly impacts or changes the job of everyone on the team, don’t do it. It is wasteful to train someone on something they may never or rarely use. Return the team’s focus to aligning with the targeted outcome, and those that will work on the technology will be trained. And remember, it may not be a bad idea to ask workers if they are interested in this training or whether they would want to work on some other job function that may not require the training — this too may help minimize adoption failure.

4. Now you have not only pinpointed the technology and the accompanying talent, but created a roadmap — The automation roadmap is key to identifying specific parameters and benchmarks for the process. This roadmap should include tight timelines such as three to six months from its start over a period of time. Because technology changes so rapidly, using this approach helps measure whether the tools you have are still working. Of course, this doesn’t mean technologies may need to be replaced, it could be as simple as making sure your team is working on the last version of the software or technologies you own. The roadmap can also provide opportunities to review the skills and talents of those working on the technology and determine whether they are still the right fit or if additional training or even new hires may be needed.

Eventually, tax teams will work with tax technologists or the company’s IT team, but tax department leaders will need to drive the initiation or expansion of automation in the tax department. As a business leader and advisor to the business, tax team leaders need to ensure that the processes and automation undertaken can make the tax team better at managing risk and delivering value to the business.

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Volume 47, Issue 5, June 2018, Pages 854-871

https://doi.org/10.1016/j.respol.2018.02.010Get rights and content

When the Affordable Care Act (ACA) was enacted on March 23, 2010, the federal government included a 2.3% excise tax on medical devices to help cover the costs of the expanded health insurance coverage. Medical device manufacturers criticized this excise tax, insisting that the tax would harm their research and development (R&D) investment and performance and thus should be abolished (Gravelle and Lowry, 2014). According to a Research America (2016) report, total R&D spending in medical and health care industries was $158.7 billion in 2015, with the medical device industry as one of the top five R&D-intensive industries. One of the largest medical device manufacturers, Stryker Corporation, estimated that this new excise tax would cost it approximately $100 million in 2013. Yet no prior study has examined whether the medical device excise tax affects firms’ R&D investment and performance in a negative way. In this article, I thus investigate how the excise tax affects R&D investment and various performance metrics (i.e. sales revenue, gross margins, and earnings) for medical device firms.

The excise tax could affect the medical device industry in different ways. On the one hand, the statutory incidence of the medical device tax on firms could increase the cost of production and shift the market supply curve upward. Then, the tax incidence would reduce firm sales, profits, and R&D investment if the price elasticity of market supply was relatively lower than market demand. On the other hand, if medical device manufacturers have high price elasticity with respect to the tax, they could pass the excise tax to consumers through prices (i.e. the tax is “passed forward”) and keep their original profits and margins. Therefore, the effects of the medical device tax on firm R&D and performance could differ depending on the elasticity of supply and demand for medical devices (Harberger, 1962), which is worthwhile to investigate empirically.

To identify the effects of the medical device tax on firm R&D investment and performance, I use the difference-in-differences (DD) framework. Specifically, I compare a treatment group of firms producing medical devices with a control group of high-tech firms producing non-medical devices, such as pharmaceutical products (Barry, 2005; Wolf and Terrell, 2016), before and after the excise tax incidence. For the empirical analysis, this article focuses on four different types of firm-level variables: (1) R&D expenditures, (2) sales revenue, (3) gross margins, and (4) earnings (profits). Analyzing the COMPUSTAT data from 2006 to 2015, I find that the medical device tax significantly reduced R&D expenditures, sales revenue, gross margins, and earnings by approximately $34 million, $188 million, $375 million, and $68 million, respectively, for firms in the treatment group.

In addition, the empirical findings suggest that the excise tax affected operating costs and market strategies for medical device manufacturers. These firms reduced their operating costs to alleviate the excise tax burden. They also significantly increased the global market sales intensity (i.e. the degree to which their sales revenue comes from operations in foreign countries) and global market diversification (i.e. the degree to which they diversified their businesses across different foreign markets) after the tax incidence because medical device sales outside the United States are tax-exempt. Furthermore, these firms increased customer market diversification (i.e. the degree to which they diversified their major customers in the United States) in an effort to reduce market power of major customers, to facilitate the passing of the excise tax to consumers through price.

This article contributes to the literature in two major ways. First, to the best of my knowledge, this article is the first to assess the effects of the medical device tax on firm performance and R&D investment. One recent study (Schmutz and Santerre, 2013) forecasted how much the excise tax would reduce R&D spending in the medical device industry. This article differs in the way it estimates the ex-post causal effects of the excise tax on firm performance in addition to R&D investment. As the medical device industry is highly R&D intensive and R&D is a primary driver of firm productivity and economic growth (Minniti and Venturini, 2017; Siliverstovs, 2016), it is critical to understand how the government tax policy affects firm performance in the R&D-intensive industry. Yet previous research has mostly focused on investigating the impact of R&D subsidies or tax credits on R&D investment in non-medical device manufacturing industries (Bloom et al., 2002; Bronzini and Iachini, 2014; Czarnitzki et al., 2011) or the pharmaceutical industry (Grabowski and Vernon, 2000; Scherer, 2001; Vernon, 2005).

Second, as the medical device market has not previously been subject to an excise tax, the estimation results in this article help clarify how medical device firms respond to the ad valorem excise tax and pass their tax burdens to customers. In particular, the empirical findings for the reduction in firm gross margins due to the excise tax suggest that firms in the medical device industry cannot fully pass the tax to consumers through prices, and therefore they reduce their operating costs to alleviate the excise tax burden. In addition, in contrast with other government policies, such as R&D subsidy or tax credit programs, the sample firms in this study do not suffer from a self-selection bias from participating in government programs, because the ACA excise tax is applied to all manufacturers, producers, and importers in the US medical device industry.

The rest of this article proceeds as follows: Section 2 explains the introduction of the medical device tax by the ACA, reviews previous literature on the effects of government tax policy on firm R&D, and demonstrates how the medical device tax affects firm R&D investment and performance. Section 3 describes the COMPUSTAT data and presents the descriptive statistics of the sample. Section 4 establishes the empirical strategy for identifying the effects of the medical device tax on firm R&D investment and performance and presents the empirical results. Section 5 provides concluding remarks.

The ACA, also known as “Obamacare,” was signed into law by the former US president Barack Obama on March 23, 2010. It included three key mandate provisions (i.e. employer, individual, and dependent coverage) to expand health insurance coverage to universal levels. To help cover the costs of the expanded health insurance coverage, the ACA also included several new taxes and fees imposed on several sectors.1

To examine how the medical device tax affected firm R&D investment and performance, I use the COMPUSTAT data from 2006 to 2015, which covers the periods before and after the tax incidence by the ACA.9

To analyze the effects of the medical device tax on firm R&D and performance, I use a standard DD framework. For the identification strategy, I compare the medical device manufacturers with firms producing pharmaceutical products, ophthalmic goods, and hearing aids before and after the tax incidence in 2013. Under this DD framework, I estimate the following model:yi,j,t=α1I(Med.Device)·I(Post2013)+α2I(Med.Device)+α3I(Post2013)+Xi,j,t'α4+Tt'α5+ϑj'α6+εi,j,t,where yi,j,t is the R&D expenditure

This study examines how the medical device excise tax affects firm R&D investment and performance. Using the DD framework as the identification strategy, I compared R&D investment and performance (i.e. sales revenue, gross margins, earnings, ROE, ROA, and Tobin’s q) for firms in the medical device and other high-tech industries before and after the tax incidence in 2013. The empirical results suggest that the ACA medical device tax significantly reduced R&D investment, sales revenue, gross

The author thanks Neil Bruce, Terry Shevlin, Stephen Turnovsky, Jun-Koo Kang, Eric Zivot, Seik Kim, Ju-Yeon Lee, Laura Jolly, David Spalding, Carl Weems, Jonathan Fox, Jennifer Margrett, Carla Peterson, and attendees of the public finance and corporate finance seminars at the University of Washington, Iowa State University, KAIST, and Peking University for their valuable comments. The author also thanks the editor and the anonymous reviewers for their constructive feedback.

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