Part 1 - AL-Tax

International Taxation Handbookthat they joined the EU in 1981 and 1986 respectively. Therefore a higher rate of technologicalgrowth is expected for them at that time than for the rest of the countries.The backward-looking ETRs, presented below, are usually accused of containingtoo much fluctuation produced by the business cycle and the general economicconditions, which affect the profits of the firm. Along the same lines, we can arguethat the forward-looking ETRs have too little fluctuation when ignoring technologychange. While some economic parameters can be supposed to remain stableover time and across countries, the rate of technological growth is certainly notone of them.On the other hand, the proposed approach has a clear limit in requiring a valuefor the variable g, although particular values for each industry might be constructed.2.2.4 Average ETRIn the average ETR (AETR) popularized by Devereux and Griffith (1998), the firmhas an investment project generating economic rents (i.e. the firm earns more thanthe capital costs). Here, instead of choosing the optimal size of capital stock, thefirm faces mutually exclusive choices, such as setting a plant in one country oranother, selecting the firm’s technology, choosing the product type or quality, etc.Therefore, a firm would select project A over project B if the net present value ofA were higher than that of B (NPV A NPV B ). Heavily drawing from Sørensen(2004), and keeping abstracting from debt finance, let us examine the similaritiesand differences between the marginal and average tax.The AETR can be interpreted as influencing the investment location decision andthe METR as determining the optimal level of investment conditional on one of theprojects already chosen. In this way, now the tax will drive a wedge between the netpresent value before tax (NPV*) and the net present value after tax (NPV):NPV* NPVT NPV,where NPVT is the net present value of taxes. Rearranging terms we can express theAETR as the proportion of the value of the project paid in tax:NPV NPVTAETR 1 NPV* NPV *.The NPVT is equal to the present value of tax paid less allowances: ( )NPVT ( )e( ) τ δρδπ t τ p δ∫ p dt A0 ρδπ A22