Part 1 - AL-Tax

International Taxation HandbookThe selection of a marginal vs. an average tax may have a more clear-cut outcome.Devereux and Griffith conceive the average tax as influencing mutually exclusiveinvestment decisions and leave the place of determining the optimal level of investmentfor the marginal tax. Furthermore, the properties of these taxes permit theconstruction of different models, such as that of Devereux et al. (2002). However,in a competitive market, economic rents are not expected to last and marginal oraverage taxes could be used interchangeably.AcknowledgmentsFernando Ruiz is indebted to IAP 5/26 for financial support.Notes1. Some authors call the forward-looking tax the effective tax and the backward-looking tax theimplicit tax.2. For the moment we abstract from the form the investment is financed, and we assume that thefirm’s discount rate is equal to the nominal interest rate (ρ i r π).3. This function will take a particular form in expression (2.8).4. Similar conclusions follow for a capital exporting country.5. The book is usually referred to by the name of the editors (King and Fullerton), although it waswritten by a larger team of economists.6. Another measure presented in King and Fullerton is the tax wedge expressed as a percentage ofthe return to the saver.7. Some of these formulas are in Hall and Jorgenson (1967).8. See Appendix A for a discussion of different forms of corporate tax system. Lindhe (2002) analyzeshow the various systems affect the cost of capital.9. Tax relief methods intend to avoid the double imposition derived from taxing the same object indifferent jurisdictions. The main systems are presented in Appendix B.10. The derivation of equation (2.14) is as follows. Taking equation (2.2) and multiplying by G wehave GK Gl δk. We can express K as:makingid ⎛ k ⎞ GK dt⎝⎜G ⎠⎟1G kik G g ,Replacing the above, we obtain expression (2.14).gdkdtdG d t.G kG2dGdt36