The Calculation of Marginal Effective Tax Rates
International Monetary Fund (IMF) - Fiscal Affairs Department
May 31, 1998
The objective of this working paper is to describe the methodology used to undertake the marginal effective tax rate (METR) calculations contained in the final report issued by the Technical Committee on Business Taxation. The data underlying the computations are also described and presented, as are various illustrative calculations that supplement the cases covered by the effective tax rates presented in the Technical Committee’s report. The model used to calculate the METRs updates, and expands on, earlier Canadian work. The main extensions to the model are: for METRs on tangible capital, incorporation of federal and provincial capital taxes, and provincial sales taxes on capital inputs, in addition to federal and provincial corporate income taxes; METRs on research and development (R&D), labour, and total production cost; METRs for non-tax-paying firms; and finally, METRs on tangible and intangible capital using industry-specific debt-asset ratios. These additions allow for an analysis of METRs on a broader range of production inputs and accounting for a larger variety of federal and provincial taxes. This has become more relevant for the study of the impact of taxation, given the increase in the relative importance of taxes that are not sensitive to profits (i.e. payroll and capital taxes).
The METRs for the current Canadian corporate tax system vary across firm size, asset type and industries. Generally, small firms face lower METRs than large firms, regardless of the type of investment they make. Investments in machinery, R&D, and exploration and development (E&D) are subject to lower METRs than investment in structures, land and inventories, and METRs on labour are appreciably lower than METRs on capital (except R&D). Finally, a comparison of METRs across industries shows that, in general, service industries are treated less favourably than manufacturing and resource industries.
Also provided, to allow international comparisons, is a calculation of METRs on tangible capital in the G-7 countries and Mexico. Canadian METRs on tangible capital are generally lower than those in Germany, Italy and Japan, but higher than those in the rest of the G-7 countries and Mexico. However, investment in manufacturing equipment is treated more favourably in Canada than in most of the other G-7 countries, including the United States, and investment in R&D is treated more favourably in Canada than in the United States.
Finally, a simulation of the Technical Committee’s policy package shows that the Committee’s recommendations would result in little change in the overall level of METRs, but that the variation in METRs would be reduced substantially, especially those across industries.
Keywords: marginal effective tax rate, statutory tax rate, tax depreciation, economic depreciation
JEL Classification: H24, H25working papers series
Date posted: April 23, 2011
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