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Measuring Marginal Effective Tax Rates: Theory and Application to Canada

  • Robin BOADWAY

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.

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Article provided by ENSAE in its journal Annals of Economics and Statistics.

Volume (Year): (1988)
Issue (Month): 11 ()
Pages: 73-92

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Handle: RePEc:adr:anecst:y:1988:i:11:p:04
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