Tax distortions from inflation: What are they? How to deal with them?*
https://doi.org/10.3326/pse.47.3.3 | Published online: September 4, 2023 Table 1
Adjustment of income tax thresholds
^{a} All but the highest bracket are indexed since 2022.^{b} Adjusted for average wage growth.^{c }If inflation > 3%.Source: Authors’ compilation based on IBFD and official websites.Figure 1
Effective tax rates on real savings returns (in %) Notes: Assumed tax rate of 25 percent.Source: Authors’ calculations.Figure 2
The impact of inflation on the trade-off between capital gains and distributions (in %) Assumptions: Tax rate: 25 percent, real return: 3 percent, real discount rate: 0 percent. For the 10-year distributing assets, all distributions (interest, rents, dividends) are assumed to be reinvested at the same conditions.Source: Authors’ calculations.Figure 3
The impact of inflation on the NPV of depreciation allowances Source: Authors’ estimates. Figure 4
Distribution of depreciation rates Source: OECD’s effective tax rate database, WEO database, authors’ computations. Figure 5
Effective tax rates as a function of inflation Notes: The calculations assume a CIT rate of 25 percent, both true economic depreciation and depreciation allowance of 12¼ percent, a real interest rate of 5 percent, and for the EATR, a financial return of 20 percent.Source: Authors’ calculations.Figure 6
Critical debt shares as a function of depreciation rates Notes: The graph gives debt shares (for three different inflation levels and a continuum of depreciation rates) for which a marginal increase in inflation leaves the optimal investment volume unaffected (equation 23). Firms with lower debt shares will reduce their investment volume in response to a marginal increase in inflation, while those above will increase it. The simulation assumes ϕ = δ, r = 0.05 and τ = 0.25. Table 2
The impact of inflation on investment
Notes: Table summarizes results of OLS regressions. All specifications include a set of country and a set of year-fixed effects. The variable CIT rate is centred at its mean of 25 percent; the variable Inflation is centred at its median of 4 percent. *, **, and *** indicate statistical significance at the 10, 5, and 1 percent level, respectively. Standard errors in square brackets are heteroscedasticity robust. Table 1 Adjustment of income tax thresholds DISPLAY Table Figure 1 Effective tax rates on real savings returns (in %) DISPLAY Figure Figure 2 The impact of inflation on the trade-off between capital gains and distributions (in %) DISPLAY Figure Figure 3 The impact of inflation on the NPV of depreciation allowances DISPLAY Figure Figure 4 Distribution of depreciation rates DISPLAY Figure Figure 5 Effective tax rates as a function of inflation DISPLAY Figure Figure 6 Critical debt shares as a function of depreciation rates DISPLAY Figure Table 2 The impact of inflation on investment DISPLAY Table |
September, 2023III/2023 |