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Tax distortions from inflation: What are they? How to deal with them?*
Article | Year: 2023 | Pages: 353 - 386 | Volume: 47 | Issue: 3 Received: January 26, 2023 | Accepted: May 2, 2023 | Published online: September 4, 2023
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FULL ARTICLE
FIGURES & DATA
REFERENCES
CROSSMARK POLICY
METRICS
LICENCING
PDF
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No inflation adjustment
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Regular
adjustment
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Unclear
process
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Automatic
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131 countries
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Argentina
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Austriaa
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Azerbaijan
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Canada
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Belgium
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Chile
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Colombia
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Denmark
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Costa Rica
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Israel
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Ecuador
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Netherlands
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Finland
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Serbiab
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France
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Taiwan, POCc
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Germany
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United States
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Honduras
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Venezuela
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Iran
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Norway
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Paraguay
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Peru
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South Africa
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Sweden
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Turkey
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Ukraine
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Uzbekistan
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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.
Notes: Assumed tax rate of 25 percent. Source: Authors’ calculations.
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.
Source: Authors’ estimates.
Source: OECD’s effective tax rate database, WEO database, authors’ computations.
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.
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.
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Dependent variable: percentage
change of real asset stock
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Type of investment asset
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Construction
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Intellectual
property
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Machinery
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ICT
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CIT rate
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-0.156***
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-0.057
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-0.241***
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-0.167
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[0.038]
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[0.081]
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[0.064]
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[0.236]
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Inflation
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0.109
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-0.195
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-0.111
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-0.145
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[0.084]
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[0.202]
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[0.119]
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[0.800]
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CIT
rate*Inflation
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-0.014*
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-0.029*
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-0.035**
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-0.043
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[0.008]
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[0.017]
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[0.017]
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[0.053]
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log(Population)
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-3.248
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9.417
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15.628***
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22.128
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[2.405]
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[5.876]
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[3.206]
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[18.456]
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Unemployment
rate
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-0.299***
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-0.466***
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-0.371***
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-0.904**
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[0.051]
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[0.116]
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[0.070]
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[0.426]
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log(GDP)
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-6.004***
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-3.374*
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-5.413***
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-21.718***
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[0.928]
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[1.888]
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[1.237]
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[5.485]
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GDP growth
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0.026
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0.117
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0.218***
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0.525*
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[0.811]
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[1.744]
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[1.653]
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[5.348]
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Intercept
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53.681***
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2.347
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-10.237
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83.126*
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[9.642]
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[16.181]
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[11.607]
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[48.669]
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Observations
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500
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522
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520
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401
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Adjusted R2
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0.561
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0.448
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0.63
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0.228
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September, 2023
III/2023
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