Effective Average Tax Rates for Permanent Investment, Issues 2008-2056
This paper extends the effective average tax rate (EATR) developed in Devereux and Griffith (2003) by relaxing the assumption of a one-period perturbation in the capital stock. Instead it allows a permanent investment. While this may appear a small change, it has important implications. First, it allows the EATR to be calculated in the presence of tax holidays, which are an important part of tax systems, especially in developing countries. Second, it reveals an interesting feature of the original EATR: despite the assumption of a one-period investment, the original measure is informative about long-term investments, thanks to the assumption of pooled depreciation. Without this assumption-which is justifiable in a few countries only- the EATR based on one-period perturbation in the capital stock would be less useful for analyzing medium and long-term investments.
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Effective Average Tax Rates for Permanent Investment (EPub)
Mr. Alexander Klemm
Limited preview - 2008
3.5 percent absence of taxation after-tax rent assumption of pooled assumptions into equations average tax rate benefit capital perturbation capital stock cash flow tax cost of capital countries data from Devereux depreciation is taxed Devereux and Griffith Devereux-Griffith EATR Devereux-Griffith tax rate disinvestment economic rent earned effective tax rates EMTR EATR equity excess depreciation financed by retained financial effects firms future periods Griffith and Klemm Griffith Investment Taxed horizon indefinite investment infinite-horizon inflation investment in plant investors official depreciation allowance one-period capital one-period investment one-period perturbation Permanent Excess Depr permanent investment personal taxes excluded plant and machinery pooled depreciation presence of taxation present discounted value profit rate EATR rate of interest rates under tax real rate retained earnings Selected Advanced Economies shows effective tax simplifies Substituting tax holiday Tax Rate EMTR tax-written down value Taxed EATR Taxes In percent taxes were excluded term investment true economic depreciation value of depreciation zero