Taxation and the Cost of Capital in Hungary and Poland: A Comparison with Selected European Countries

Abstract

This paper compares the effective rates of taxation faced by a representative investor located in a major capital-exporting country for investments in machinery and buildings in nine capital-importing European countries. Poland and Hungary are found to have relatively high effective tax rates on equity-financed investment. The analysis suggests that both countries would benefit from streamlining capital cost recovery allowances and possibly lowering statutory corporate tax rates--as permitted by the revenue constraint--rather than providing tax preferences for foreign investors.

JEL Classification: 123, 311, 313, 321, 520