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Unintended technology-bias in corporate income taxation: The case of electricity generation in the low-carbon transition

Author

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  • Luisa Dressler
  • Tibor Hanappi
  • Kurt van Dender

Abstract

This paper shows that corporate tax provisions can lead to different effective tax rates (ETRs) if there is a capital cost-intensive and a variable cost-intensive way of producing the same output. It develops a framework for analysing sources of the difference in ETRs and adapts existing models to compare forward-looking ETRs for low-carbon and high-carbon electricity generation technologies, considering tax provisions for cost recovery in 36 countries. It finds that standard tax systems are technology neutral when investments are debt-financed because the deductibility of interest payments compensates for the fact that capital allowances are based on nominal (rather than real) capital costs. Under equity finance, ETRs are higher for investments in capital-cost-intensive technologies as the cost of equity finance is often not deductible. Since low-carbon electricity generation tends to be relatively capital-intensive, this result represents a form of unintentional misalignment of the corporate tax system with decarbonisation objectives,.

Suggested Citation

  • Luisa Dressler & Tibor Hanappi & Kurt van Dender, 2018. "Unintended technology-bias in corporate income taxation: The case of electricity generation in the low-carbon transition," OECD Taxation Working Papers 37, OECD Publishing.
  • Handle: RePEc:oec:ctpaaa:37-en
    DOI: 10.1787/9f4a34ff-en
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    More about this item

    Keywords

    corporate taxation; cost structure; electricity generation; low-carbon transition; technology choice;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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