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?
Muskie School of Public Service Ph.D. Program in Public Policy
CONCLUSION
CALIBRATION MATTERS
TAX RATES HAVE LITTLE IMPACT
Muskie School of Public Service Ph.D. Program in Public Policy
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
Muskie School of Public Service Ph.D. Program in Public Policy
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
Muskie School of Public Service Ph.D. Program in Public Policy
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
Muskie School of Public Service Ph.D. Program in Public Policy
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
Muskie School of Public Service Ph.D. Program in Public Policy
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
Muskie School of Public Service Ph.D. Program in Public Policy
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
Muskie School of Public Service Ph.D. Program in Public Policy
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
Muskie School of Public Service Ph.D. Program in Public Policy
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
Muskie School of Public Service Ph.D. Program in Public Policy
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
Muskie School of Public Service Ph.D. Program in Public Policy
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
Muskie School of Public Service Ph.D. Program in Public Policy
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?