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Measuring Marginal Effective Tax Rates: Theory and Application to Canada

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  • Robin Boadway

Abstract

This paper summarizes the various methodologies for estimating marginal effective tax rates applying to investment decisions. The conceptual framework is developed for several types of investment decisions, including depreciable capital, inventories, and depletable assets. The analysis involves incorporating personal and corporate taxes into the neo-classical theory of the firm. Some of the theoretical issues are discussed including the treatment of adjustment costs, nonprice-taking behaviour, and the implications of an open economy. The problems involved with implementing effective tax rates empirically are discussed. These include the arbitrage assumption, the treatment of risk, the treatment of firms temporarily in a non-taxable position, and data problems, including problems of aggregation. A number of illustrative calculations are presented using Canadian data.

Suggested Citation

  • Robin Boadway, 1988. "Measuring Marginal Effective Tax Rates: Theory and Application to Canada," Annals of Economics and Statistics, GENES, issue 11, pages 73-92.
    • Handle: RePEc:adr:anecst:y:1988:i:11:p:73-92
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