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The Effect of Inflation and Interest Rates on Forward-Looking Effective Tax Rates

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  • Centre for European Economic Research (ZEW)

Abstract

The study delivers qualitative assessments of the sensitivity mechanisms at work as well as quantitative results. Tax systems are related with interest and inflation rates through various mechanisms which sometimes act in qualitatively different directions. Such a mechanism is, for example, that usually nominal returns are taxed rather than real returns. The Devereux/Griffith model incorporates these mechanisms of real world tax systems and allows for precise quantification.The broad range of figures produced in this study helps to illustrate and indicate the levels of effective tax burdens in different countries for a series of relevant situations. For comparing tax systems in the member states, common assumptions on interest and inflation rates are essential. Although there are no “universally true values” for effective tax levels in the member states, the analysis shows that the base case gives a good indication of the member states’ effective tax levels and member states’ relative position in a cross-country comparison.

Suggested Citation

  • Centre for European Economic Research (ZEW), 2016. "The Effect of Inflation and Interest Rates on Forward-Looking Effective Tax Rates," Taxation Papers 63, Directorate General Taxation and Customs Union, European Commission.
  • Handle: RePEc:tax:taxpap:0063
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    File URL: https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_63.pdf
    File Function: final version, 2016
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    More about this item

    Keywords

    corporate taxation; effective tax rates; inflation; interest rates; tax burden;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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