Part 1 - AL-Tax

International Taxation HandbookProposition 4 In the absence of personal taxes, the AETR approaches the statutorytax rate for high rates of return.ProofAs p : , it follows immediately from equation (2.15) that AETR :τ.The last two propositions reflect the lower and upper bounds for the AETR. Theycan be summarized observing that the AETR can be written as a weighted averageof the METR and the statutory rate. Using equations (2.16) and (2.17), we can writethe AETR as:⎛ pɶ⎞ ⎛ pɶ⎞AETR METR 1 (2.17)⎝⎜p ⎠⎟⎝⎜p ⎠⎟ τ,where for the marginal investment p˜ p and AETR METR, and for high rates ofreturn (p : ), AETR τ.Proposition 5 In the absence of personal taxes, the AETR increases with profitabilityif and only if the statutory tax rate is higher than the METR.Proof It follows from differentiating equation (2.17) with respect to p.Proposition 6 Under full immediate expensing the AETR approaches the statutorytax rate for high rates of return, in the absence of personal taxes.Proof It follows from Propositions 1 and 4.The method of Devereux and Griffith is not the only one to calculate an ex-anteAETR. The Centre for European Economic Research and the University ofMannheim have developed the so-called European Tax Analyzer, which allowsfor the inclusion of more complex and realistic conditions. They have constructeda model-firm approach based on an industry-specific mix of assets and liabilities,including a large number of accounting items. Although the model derives the pretaxand post-tax values of the firm in a more sophisticated way, making assumptionsabout the activities of the firm during a 10-year period, the notion of the AETRremains the same (see Jacobs and Spengel, 1999).2.2.5 An extension to the EATR with uncertainty and theentrance of rival firmsDespite its great simplicity, the ex-ante AETR neglects the fact that the pre-taxrate of return on the project (p) is uncertain and subject to decline due to the24