Measuring tax distortions with neutrality-based effective tax rates

摘要

In public economics, effective tax rates (ETRs) are often used to measure the combined effects of tax rates, tax bases, and the time effect of taxation. Until now, the modelling of comparable figures for revealing tax effects and tax-induced distortions is not solved satisfactorily. This paper derives an ETR approach based on neutral tax systems. In contrast to traditional measures of ETRs, the neutrality-based ETR discloses preferential or discriminatory taxation of investments regardless of their pre-tax rate of return. Moreover, comparing different ETRs exposes the degree of tax-induced investment distortions.