Marginal Effective Tax Rates on Physical, Human and R&D Capital

This paper presents marginal effective tax rates (METRs) for a number of physical and intangible assets and for a number of funding sources. The assets include machinery, buildings, inventories, investments in short-lived R&D (that is, investments whose returns last only a few years) and firm-sponsored training and household-sponsored tertiary education. The calculations incorporate parameters from both the personal and corporate tax codes. They are performed for the "top-bracket" taxpayer and for the "average production worker" and cover between 15 and 22 countries, depending on data availability. The OECD has already used the King-Fullerton method to calculate METRs for physical capital (OECD, 1991) and this paper updates these calculations using established practices. As the method has not yet been applied to household-sponsored human capital, the paper describes the extension to this type of investment in some detail. The international averages for the METRs show that intangible capital generally receives more favourable tax treatment than physical capital. On average, the most favoured investment category is short-lived R&D. Household-sponsored human capital also receives favourable treatment. However, this stems from mainly direct subsidies given in the form of scholarships or below-cost charging for public education; the tax system itself tends to offset the incentive effects of direct subsidies. Firm-sponsored training also receives favourable treatment compared to that accorded to physical capital