Part 1 - AL-Tax

International Taxation Handbook2.3.1.2 Macro dataThe macro approach employs aggregate macroeconomic data of tax revenue andnational accounts to compute the effective tax. The first of these methods is theuse of corporate tax revenue expressed as percentage of GDP. Among the studiesthat utilize this method are Slemrod (2004) and Quinn (1997), or articles such as TheEconomist (2004). In spite of its simplicity and the availability of information togenerate time series, this method is not really effective as regards corporate tax, giventhat by definition the GDP is the sum of all factor incomes. Mendoza et al. (1994) proposedthe use of the corporate tax revenue plus an estimation of the capital incometax on individuals as a measure of the effective capital tax paid over the total operatingsurplus of the economy as a measure of the tax base. The main problem of thismethod is the assumption that households pay the same effective tax rates on capitaland labor incomes, when in reality countries apply different statutory tax ratesto income from different sources (see Haan and Volkerink, 2000). Martinez-Mongay(2000) adapted the method to use data available at the European Commission andthe OECD, but he still considers that household income pays the same averagetax rate regardless of the source of such income, whether labor or capital. Carey andTchilinguirian (2000) observed that and other problems, such as the assumptionthat all self-employed income is assigned to capital and the lack of harmonizationamong the national accounts of the countries. They refined the estimates of Mendozaet al., obtaining a somewhat higher effective tax rate on capital, although in general,this change in level does not affect the evolution of the series over time or the crosscountrycomparison. Another work that applies an equivalent methodology is Structuresof the Taxation Systems in the European Union (European Commission, 2003).Overall, the main advantage of these methods is the facility of computation andthe data availability. They also take into account implicitly all the elements of taxation.On the other hand, the measure of the effective tax is affected by businesscycles, producing high variability in the estimates, having as a direct consequencethe difficulty of linking the effective tax to changes in tax policies. Nevertheless,Mendoza et al. argued that this problem is attenuated by the fact that tax revenuesand tax bases tend to move together, although this observation does not accountfor the possibility of carrying forward and carrying back losses, which causes adesynchronization with the cycle.2.3.2 Marginal ETRRecently, Gordon et al. (2003) proposed a marginal effective tax rate which may beestimated with ex-post data on tax revenue and income. Their idea is that there30