Effective Average Tax Rates for Permanent Investment

Abstract

This paper extends the effective average tax rate (EATR) developed in Devereux and Griffith [3] by relaxing the assumption of a one-period perturbation in the capital stock. While this may appear to be a purely technical change, it has important implications. First, it allows the EATR to be calculated in the presence of special regimes such as tax holidays, which are an important part of tax systems, especially in developing countries. Second, itreveals an interesting feature ofthe original EATR:despite the assumption of a one-period investment, the original measure is informative about long-term investments, thanks to the assumption of pooled depreciation. Without this assumption – which is justifiable in a few countries only – the EATR based on one-period perturbation in the capital stock would be less useful for analyzing medium and long-term investments.