advantages, among them a low data requirement, flexibility and a definition of the effective tax rate that
is straightforward and meaningful. A similar methodology can be used to detect potential poverty and
employment traps, by comparing income in work and out of work for typical situations.
There is a large economic literature on the taxation of income from capital. King and Fullerton (1984)
provided an interesting framework for computing marginal effective tax rates and DEVEREUX and
GRIFFITH (1998) extended it to average effective tax rates^7. Both indicators are well known and have
been largely used in empirical studies on corporate taxation at the national and international level.
They rely on key parameters of the tax code: the nominal tax rate, depreciation rules incentives, the tax
treatment of interest, dividends and capital gains. The METR refers more to the effect of taxes on
investment in the extensive margin (how much to invest in a given location), while the AETR is more
convenient to assess to effect the tax system on the comparison of various locations. Both indicators
illustrate the non-neutralities across assets and way of financing (debt versus equity). They also highlight
the effects of tax incentives and preferential tax regimes. EATR and METR are so interesting indicators:
they shed some light on the neutrality of the tax system.
They however only give a partial view of the disparities of effective taxation, since they do not
incorporate all the relevant features of the tax system, including tax planning techniques^8.
An alternative approach is to compute effective tax rate on micro-data. The ETR may be defined by
dividing the CIT liability by a measurement of profits based on profits and losses accounts^9. HALLEUX
and VALENDUC (2007) use a similar approach and define the ETR at the micro-level by dividing the
CIT liability by the benchmark tax base (what the tax base should be without tax expenditures). Such
indicators are not forward-looking but they tell more on the dispersion of effective taxation compared to
the highly stylised approach of EATR and METR.
Studies on effective tax rate of savings are not so common^10 , while useful. In a small open economy,
taxation of savings and taxation of investment have to be assessed separately, especially in the Euro—
zone. Small open economies are price-taker on capital markets. The consequence is that taxation of
companies has no effect on savings, while domestic taxation of savings has no effect on the cost of
capital, which equals the sum of the world interest rates and of the investment tax wedge (in which
corporate taxes are factored in).
Our methodology defines “effective tax rate of savings” as the difference between gross and let real rate
or return, divided but the gross real rate of return^11. Computations are made under simplifying
assumptions; no risk, infinite horizon, no change in interests and inflation. Effective tax rates are
computed for bonds, shares, pension savings, owner-occupied housing and real estate investments.
(^7) VALENDUC (2004a compares properties of effective and implicit tax rates and concludes that both type of indicators
are useful to assess the taxation of profits. They are more complements than substitutes.
(^8) This holds for the basic definition of EATR and METR and for most of the studies that use them at the national and
international level. It is however possible to include tax planning techniques in the framework. VALENDUC (2004a)
includes in the framework triangle structures with a Belgian Coordination centre. Recent OECD work (OECD 2008)
provides very interesting example of the effect of tax planning techniques on AETR and concludes that conventional
indicators that do account for tax planning overestimate the effective tax burden and underestimate the dispersion of
AETR and non-neutralities in corporate income taxation.
(^9) Cf OECD (2003).
(^10) See OECD (1995).
(^11) Cf. VALENDUC (2003).