Part 1 - AL-Tax

Chapter 2Defining the efficiency capital k G t K, we take this as the relevant input variable.The transition equation for this new state variable can be found from equation(2.2): 10 ik i k( δ g),(2.14)where g is the rate of technological growth.Replacing the new production function in equations (2.3) and (2.4), and maximizingsubject to (2.14), we obtain the Euler condition: ACt F( kt) ( δρπ g) 1 ,1 τwhere, as expected, the rate of technological growth reduces the cost of capital.This new variable is a country specific as much as inflation or the tax codes.Ignoring it can lead to some misleading interpretations of a capital income tax.For instance, two or more countries with equal inflation, tax rates, and tax base canbe considered to have the same METRs in the traditional analysis. Nevertheless,if one of the countries is subject to a rapid technology change, it is normal, insome way, to put aside the statutory tax rate and to really consider a smaller effectivetax.Devereux et al. (2002) have constructed METR series for a number of countries.Following the analysis above, we can question the comparability across countriesand through time of those values. From Figure 2.3 we can ask whether the highMETRs at the beginning of the 1980s for Greece and Portugal have any meaning given70%60%50%40%30%20%10%0%1982 1984 1986 1988 1990 1992 1994 1996 1998 2000FRAUKGERGREIREITAPORSPAUSAFigure 2.3METRs21