A decomposition algorithm for computing income taxes with pass-through entities and its application to the Chilean case

DOI10.1007/S10479-017-2707-9MaRDI QIDQ2178362zbMATH OpenOpenAlexWikidataFDO

Authors Javiera Barrera, Eduardo Moreno, Sebastián Varas K.

Publication date 11 May 2020

Published in Annals of Operations Research (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1611.05690

zbMATH Keywords

algorithmsnetworksMarkov processesincome taxes

Mathematics Subject Classification ID

Applications of continuous-time Markov processes on discrete state spaces (60J28) Macroeconomic theory (monetary models, models of taxation) (91B64)

Abstract: Income tax systems with pass-through entities transfer a firm's incomes to the shareholders, which are taxed individually. In 2014, a Chilean tax reform introduced this type of entity and changed to an accrual basis that distributes incomes (but not losses) to shareholders. A crucial step for the Chilean taxation authority is to compute the final income of each individual, given the complex network of corporations and companies, usually including cycles between them. In this paper, we show the mathematical conceptualization and the solution to the problem, proving that there is only one way to distribute incomes to taxpayers. Using the theory of absorbing Markov chains, we define a mathematical model for computing the taxable incomes of each taxpayer, and we propose a decomposition algorithm for this problem. This allows us to compute the solution accurately and with the efficient use of computational resources. Finally, we present some characteristics of the Chilean taxpayers' network and computational results of the algorithm using this network.

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Cited in

(1)

• A semilinear system with positivity conditions

Describes a project that uses

Uses Software

• LAPACK

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