ANNEX Calculation of The Average Effective Tax Ratios (AETRs)
In order to calculate the AETRs on capital, τk, and on labor, τl, it is necessary to calculate the AETR on total household income, τh. This is then used to allocate total household personal income tax revenues to labor and capital, assuming the same average household tax rate applies to both. The household AETR is calculated as follows:9
This states that the average effective household tax rate is the ratio of personal income taxes paid (OECD Revenue Statistics code 1100) to the sum of operating surpluses of private unincorporated enterprises (OSPUE), property income (PEI) and wages (W).
The effective tax rate on labor, τl, can then be calculated as follows:
where the taxes include personal income taxes paid on wages (at the average household rate), total social security contributions (2000) and payroll and workforce taxes (3000). The denominator contains employers’ gross labor costs, including wages as well as employer-paid social insurance contributions (2200).
The effective tax rate on capital, τk, is calculated as follows:
The first term in the numerator accounts for personal income taxes allocated to capital (note that this assigns all income from unincorporated enterprises to capital). The second, third and fourth terms include direct corporate income taxes (1200), recurrent taxes on immovable property (4100) and taxes on financial and capital transactions (4400), respectively. The denominator is the economy’s total (net of depreciation) operating surplus.
Finally, the effective tax rate on consumption, τc, is calculated as follows
where the numerator includes both general taxes on goods and services (5110), as well as specific excises (5121). The denominator includes the both private and government non-wage purchases of goods and services, net of taxes paid on these items, to reflect the tradition of expressing the tax rate as a share of the base price of the items excluding taxes.
Carey, David, and Josette Rabesona (2002), “Average Effective Tax Rates on Capital, Labor and Consumption,” Paper to be presented at CESifo 2002 Summer Institute, Paris.
Carey, David, and Harry Tchilinguirian (2000), “Effective Tax Rates on Capital, Labor and Consumption,” OECD Economics Department Working Paper No. 258, Paris.
Honohan, Patrick, and Brendan Walsh (2002), “Catching Up with the Leaders: The Irish Hare,” paper prepared for April 2002 Brookings Panel on Economic Activity, Dublin.
International Monetary Fund, 1997, “Fiscal Developments and Prospects: An International Perspective,” Chapter II, Selected Issues and Statistical Appendix, IMF Country Report No. 97/89.
Mendoza, Enrique, Assaf Razin, and Linda Tesar (1994), “Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption,” National Bureau of Economic Research Working Paper No. 4864, Cambridge, MA.
Prepared by Mark Lutz.
See Lutz (1997), and references cited therein.
See Honahan and Walsh (2002) for a fascinating discussion of the increasing role of foreign direct investment in Ireland.
Private consumption as a share of GDP in Ireland averaged 51.6 percent, 8th lowest of 25 OECD countries for which data are available, and slightly less than one standard deviation below EU15 and OECD average of 56.6 and 56.9 percent of GDP, respectively.
Income shares other than wages and net operating surplus (namely, employer-paid social security contributions, depreciation, and indirect taxes less subsidies), have remained constant at about 25 percent of GDP, and 27 percent of GNP.
Alternative measures of AETRs, incorporating increasingly realistic, albeit somewhat more complicated, allocations of aggregate tax revenue and national income components, have been suggested by Carey and Rabesona (2002), Carey and Tchilinguirian (2000), and OECD (2000). Carey and Rabesona report that the correlation coefficients between their baseline and MRT’s AETR estimates are for the vast majority of countries, including Ireland, 0.8 or greater. Moreover, the Spearman rank correlation coefficient estimates of the tax rates based on MRT’s 1996–2000 averages and Carey and Rabesona’s baseline rates were 0.94 for both labor and consumption, and 0.89 for capital. This further suggests that Ireland’s tax rate position relative to OECD partners is robust to alternate tax measures.
Ireland’s effective VAT tax rate for 1996–1999 was 15.8 percent, compared to an 14.0 percent EU average, within one standard deviation (of 3.5 percentage points). In contrast, its average effective excise rate was 10.2 percent, compared to a 6.9 percent of the EU average, with a standard deviation of 2.6 percentage points.
The terms used in the following expressions are listed in the table on the following page.