Part 1 - AL-Tax

Chapter 2Assuming that the economy has followed a ‘golden rule’ path where capital stockhas grown at a constant rate equal to the real interest rate, so that rK t I t δK t , wecan substitute this expression in equation (2.21) to obtain:T (( τ A)( r δ) τ( pr)) K .tt(2.22)Finally, replacing this in equation (2.20), we find the relation between the backwardlookingand forward-looking rates:AETRB( τ )( ) ( ) A r δ τ p r AETRF.pIt is important to highlight that this equation holds while the tax rules haveremained constant over time (a t a t1 . . .) and the economy has followed a‘golden rule’ path. It is straightforward to show that, under constant return toscale, this is also equal to the METR if p p˜. Notwithstanding, when capitalstock grows at a constant rate equal to the real interest rate considering technologicalgrowth, 12 AETR B AETR F given that the rate of return remains constant andthe amount of allowances increases ex-post, while ex-ante we need to consider ahigher net present value of taxes because of the lower discount rate.2.3.1.1 Micro dataIn the backward AETR framework one can distinguish two approaches dependingon the source of data used for the tax paid and the pre-tax income from capital. Oneapproach uses micro or accounting firm-specific data and the other approach macroor aggregated economic data.Generating an effective tax from micro data consists of taking the tax liabilitiesand profits from the financial statements of companies. The advantages of thismethod are that it can show the actual tax burden borne by companies and it canestimate an effective ex-post tax rate for different economic sectors and companysizes. Nevertheless, it has the shortcomings of being influenced by economicfluctuations and sectoral shocks, and it does not allow us to isolate features of taxsystems. Additionally, the taxation of shareholders is completely omitted and thetax liability may contain tax payments or foreign source income from other locationswhere the company operates, producing a mismatch between numerator anddenominator.A number of studies have worked with micro AETR. Among them are Feldsteinand Summers (1979), Feldstein et al. (1983), and Grubert and Mutti (2000). In the EUwe can mention the recent studies of Buijink et al. (2000) and Nicodème (2001).29