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-7- Appendix International Tax Competition,” Economic Policy 17, no. 35 (October 2002): 451–95. Data Assuming away interest taxation at the shareholder level, The main sources of information for the data compiled we calculate the shareholder’s nominal discount rate, in the AEI International Tax Database are: (1) Price- ρ = (1 + r)*(1 + π) – 1 = 13.85%. Using these inputs, we waterhouseCoopers, “Corporate Taxes—Worldwide calculate A for several cases based on requirements that Summaries” and “Individual Taxes—Worldwide vary by country: Summaries”; (2) Coopers and Lybrand, “International Tax Summaries”; (3) Ernst and Young, “Worldwide Straight line depreciation is required and there is one off- Corporate Tax Guide 2001”; (4) International Bureau set rate for all years. for Fiscal Documentation, Loose-Leaf Services; and A = (Φ*(1 + ρ)/ρ)*(1 – (1/((1 + ρ)^(1/Φ)))) (5) embassies and ministries of taxation in individual countries. Historical information was gathered from Declining balance depreciation is required and there is Georgetown Law Library and the Library of Congress. one offset rate for all years. The revenue data have been obtained from the OECD. A = Φ*(1 + ρ)/( ρ + Φ) Methodology Straight line depreciation is required and there is a differ- ent offset rate for subsequent years. The effective average tax rate (EATR) can be computed A = Φ1 + (Φ2*(1 + ρ)/ρ)*(1 – (1/((1 + ρ)^(((1 – Φ1)/Φ2) as the difference between the pretax and posttax eco- + 1)))) – Φ2 nomic rent scaled by the net present value of the pretax income stream Y * associated with investment strategy i. i Declining balance depreciation is required and there is a Conceptually, the EATR can be expressed as follows, different offset rate for subsequent years. (R*– R i) A = Φ1 + (Φ2*(1 – Φ1)*(1 + ρ)/((1 + ρ)*(ρ + Φ2))) ζi = i Y* i Straight line depreciation or declining balance deprecia- where R* = Y * – Fi is the pretax economic rent and Fi tion may be chosen, but the method must be consistent equals the fixed cost. Ri = (1 – τi )Y * – (1 – Ai)Fi is the i i for all years. There is one rate for all years. A1 = (Φ*(1 + ρ)/ ρ)*(1 – (1/((1+ρ)^(1/Φ)))) i posttax economic rent calculated as the net present value of the income stream posttax minus the net cost of the A2 = Φ*(1 + ρ)/(ρ + Φ) investment. Ai is the net present value of tax allowances per unit of investment and τi is the combined statutory A = max(A1, A2) tax rate. Straight line depreciation or declining balance depreciation We find τ, the combined national and subnational top may be chosen, but the method must be consistent for all statutory tax rate, in the OECD tax database. It accounts years. There is a different offset rate for subsequent years. for the national deductibility of subnational tax pay- A1 = Φ1 + ( Φ2*(1 + ρ)/ρ)*(1 – (1/((1 + ρ)^(((1 – Φ1)/ ments where applicable. Φ2)+1))))– Φ2 A2 = Φ1+(Φ2*(1 – Φ1)*(1 + ρ)/((1 + ρ)*(ρ + Φ2))) We calculate A, the net present value of allowances per unit of investment divided by τ, using depreciation A = max(A1, A2) allowance data from the AEI International Tax Database. In particular, the database provides a measure for Φ, the Instances where straight line depreciation or declining rate at which capital expenditure can be offset against tax. balance depreciation may be chosen and the method We also take assumptions for the real annual discount need not be consistent for all years are calculated ad hoc. rate, r =10%, and the expected annual inflation rate, Additionally, depreciation data were not available after π =3.5%, from Michael Devereux, Rachel Griffith, and 2007, so A values for 2008–2010 are set equal to values Alexander Klemm, “Corporate Income Tax Reforms and in 2007. -8- Allowances change very infrequently, so this assumption EATR = (R* – Rt)/(p/(1+ r)) t is unlikely to bias the results. Author calculations are available upon request. Taking the further assumption that the economic depre- ciation rate is δ =12.25% from Devereux, Griffith, and Klemm, we can calculate the effective marginal tax rate. Example EMTR = ((δ + r)*(τ – τ*A))/((δ + r)*(1 – τ *A) – (δ*(1 – τ))) Canada’s tax policy in the late 1980s provides a good example of how depreciation allowances can affect the Before deriving the effective average tax rate, we must effective average corporate tax rate. In 1986, Canada pro- calculate the net present value of the economic rent gener- vided a 33 percent depreciation allowance and required ated, Rt, and the net present value of the pretax economic depreciation to be calculated with the straight line rent R* . We assume that the financial return, p, is 20%. t method. In 1987, Canada undertook base-broadening tax reform and lowered its depreciation allowance to 20 per- Rt= – (1 – (A* τ)) + (1/(1 + ρ))*((1+π)*(p + δ)* cent calculated with the declining balance method. The (1 – τ)+(1+π)*(1 – δ)*(1 – (A * τ))) large allowance cut corresponded with a 24 percent drop in A, the net present value of allowances over τ. A fell R* = (p – r)/(1 + r)) t from 0.88 to 0.67. At the same time, though, Canada cut its combined top statutory tax rate from 49.8 percent in Then we obtain the EATR by dividing the difference of 1986 to 48.5 percent in 1987. The net effect on Canada’s the pretax and posttax economic rent by the net present effective average corporate tax rate was a large increase, value of the pretax income stream, net of depreciation from 31.4 percent to 42.0 percent. Large allowance cuts p/(1 + r). overwhelmed smaller statutory rate cuts.
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