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I would like to thank Mark De Broeck, Catriona Purfield, and Jerald Schiff for useful comments.
National savings during 1999–2004 in India reached 24 percent of GDP on average annually, compared to 43 percent in China, 34 percent in Malaysia, and 32 percent in Korea.
The AETR is a standard indicator of the effective tax burden on categories of income or consumption. It summarizes various tax effects, including statutory tax rates, the effective tax base (accounting for tax evasion, exemptions, and the extent of informal activity), and the quality of tax administration. It is measured as the ratio of tax collections to the notional tax base derived from national accounts. See Annex I for details on the calculation of AETRs in India.
Estimates for countries that are not members of the Organization for Economic Cooperation and Development (OECD) are not publicly available.
Tax productivity measures the extent to which revenues that should be received—given the rate and potential base of the tax—are actually being realized. It captures all the factors that influence the AETR, other than the statutory tax rates. It is measured as the ratio of the effective to statutory tax rate (Kraemer and Zhang, 2004).
In Table 3a, following the Kraemer-Zhang approach, we use the operating surplus of the economy (from national accounts) as the potential tax base. In Table 3b, in the absence of such data for non-OECD countries, we use nominal GDP.
See Annex II for tax parameters used. See OECD (1991) for further details on the methodology and parameters. Indirect taxes impose additional costs on investment, but the METR approach focuses on direct taxation, thus understating the tax burden on investors. Comparable estimates have been published for OECD countries.
The METR calculated here follows the methodology of Devereux, Griffith, and Klem (2002) and ignores any personal taxes, focusing on the marginal tax burden at the firm level.
The notional rate of return on invested equity is deductible under the CIT in Croatia (1994–2001), and imputed equity return is taxed at a reduced rate in Austria and Italy (until 2001).
The Indian constitution currently gives the center the exclusive right to tax services, while precluding it from taxing sales. To introduce the GST, a “grand bargain” therefore needs to be struck between the center and the states. Specifically, the latter would agree to let the center tax sales, in exchange for a share of GST revenues.
Labor and capital income of households are assumed to be taxed at the same rate.