barbara m. fraumeni muskie school of public service, university of southern maine

Barbara M. FraumeniMuskie School of Public Service, University of Southern Maine

& the National Bureau of Economic Research, USA

IARIW, Session 3Joensuu, FinlandAugust 22, 2006

Taxes & the Rate of Return

in User Cost Expressions

by Kirsten Bonde, Ministry of Economic & Business Affairs, Denmark

& Henrik Sorensen, Statistics Denmark

Muskie School of Public Service Ph.D. Program in Public Policy

SOURCES OF ECONOMIC GROWTH:

DOES IT MAKE A DIFFERENCE?

Tax variables or not?

Exogenous or endogenous rate of growth?


CONCLUSION

CALIBRATION MATTERS

TAX RATES HAVE LITTLE IMPACT


General Productivity Model

Aggregate production function with K, L, and TFP

Decomposition of labor productivity into K deepening, L quality, and TFP

Emphasis on aggregate production function, but industry production functions also estimated with Domar weights aggregation


User Cost Expressions

Without tax terms User cost = net return + depreciation rate –

capital gain on assets rate Rate of return depends upon the interest rate on

debt and the net rate of return on other capital With tax terms

Following Jorgenson, Ho, & Stiroh (2002)) User cost above is multiplied by a ratio tax term

(see eqn. 1.10 p. 6) and a term with the property- type tax rate is added


Endogenous Rates of Return

Calibration

User costs, not labor costs, are controlled

User costs are in general too high with exogenous rates of return

Suspected culprits: service lives and mortality functions

Aside: Statistics Finland used net capital stock, not user costs, in its productivity estimates


Impact of Taxes on K Deepening

(with calibration)

Only K deepening (TFP) can change between tax or not tax scenarios

TFP = and opposite change to K deepening

K deepening results mixed as effect of user costs without taxes is strongest in the early periods due to ICT capital, but these stocks are small in the 60’s and 70’s


Impact of Rate of Return(with taxes)

Major differences except in the 70’s

(Table 4.1, p. 13)

‘66-73 ‘79-87 ‘87-93 ‘93-00

Labor productivity -.9 .3 -.3 .5

Non-ICT K deepening -.5 -.3 -.4 .0

TFP -.4 .5 .1 .4


Impact of Rate of Return (cont.)

For the period as a whole, 1966-2003, labor productivity only differs by .1

But the decomposition of labor productivity can change significantly by year depending upon calibration or not


Impact of Taxes with an Exogenous ROR

Labor productivity growth rate is in general higher when taxes are included

Effect similar for K deepening and labor

Impact on TFP mixed

However, tax impact remains less than the calibration impact


Industry Results

Rate of Return (with taxes)

Fishery and transport show the largest changes in labor productivity

Opposite in sign

Both industries intensively use transport equipment

Much year to year variation in changes

No pattern

Leads to uncertainty in estimates


Industry Results

Taxes (with calibration)

Results more or less the same as they were at the aggregate level

For example, labor productivity growth rate is in general higher when taxes are included


Beware!

Rate of return and tax assumptions may differ among countries

Differences in productivity growth between countries may be a result of differences in assumptions, not of actual differences


Comments

Very valuable paper

Methodology & data sources for estimating RORs changed in 1995

ROR after tax is higher than the ROR before tax in some years

How is mixed income handled?

Is K adjusted for quality?

barbara m. fraumeni muskie school of public service, university of southern maine

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