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The taxation of discrete investment choices

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  • Michael Devereux

    (Institute for Fiscal Studies and University of Oxford)

  • Rachel Griffith

    (Institute for Fiscal Studies and University of Manchester)

Abstract

Traditional analysis of the taxation of income from capital has focused on the impact of tax on marginal investment decisions; the principal impact of tax on investment is through the cost of capital, and is generally measured by an effective marginal tax rate. In this paper, we consider cases in which investors face a choice between two or more mutually exclusive projects, both of which are expected to earn at least the minimum required rate of return. Examples include the location decisions of multinationals, firms choice of technology, and the choice of investment projects in the presence of binding financial constraints. In these cases the choice depends on the effective average tax rate. We propose a measure of this rate and demonstrate its relationship to the conventional effective marginal tax rate. Estimates of both are presented and compared for domestic and international investment in Germany, Japan, the UK and USA between 1979 and 1997.

Suggested Citation

  • Michael Devereux & Rachel Griffith, 1998. "The taxation of discrete investment choices," IFS Working Papers W98/16, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:98/16
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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