Part 1 - AL-Tax

Chapter 2which shows that for very profitable projects the average tax tends to τ. The intuitionwhen is that labor price remains fixed, payroll taxes and allowances becomeirrelevant for the determination of tax liability.The general characteristic of the backward-looking AETRs is that they considerdifferent kinds of taxes from various sources. In other words, they tend to aggregatetaxes on different inputs, such as corporate income taxes, property taxes on realestate, payroll taxes, etc. That somewhat arbitrary classification and sharing leadsus to include part of other inputs’ income. For example, Mendoza et al. (1994) considerin the numerator taxes on income, profits and capital gains of corporations,taxes on immovable property, taxes on financial and capital transactions, and,indirectly, taxes on income of individuals. If the diverse inputs can be expressedin a one-to-one relationship, the ex-post tax will reduce to the AETRC. Therefore,it is more precise to consider the backward-looking AETRs as an approximationto the AETRC rather than to the AETR.2.5 Conclusion: Advantages and disadvantages ofusing various ETRsThe forward-looking approach of King and Fullerton and Devereux and Griffithcan add a number of endless complications as long as careful effort is made toincorporate all provisions of the tax codes and all ways that firms and individualscan respond to them. In this chapter, we have presented and developed someof those extensions and we have given the reference of many others. On the otherhand, the backward-looking measures may take all complications implicitly intoaccount, since they work with ex-post collected revenue data. Nevertheless, thereal decisions whether to invest or not may be dominated by the current andexpected tax rules. This suggests that a forward-looking indicator is the appropriatemeasure to assess incentives to invest. At this stage one is confrontedwith reality, which gives us the choice between working an incomplete, alwaysperfectible forward-looking measure, and a sometimes misleading and biasedbackward-looking effective tax rate. The decision is not easy and the trade-offbetween completeness and bias is not clear. Both approaches can be justified ordismissed on different grounds. Therefore, we can state that none of the estimatescan claim to be accurate. They can only indicate general trends. The final choiceof the variable will depend on the particular phenomenon the researcher wantsto study, although in the observation of general trends none of the methodsshould be disregarded.35