Český finanční a účetní časopis 2012(2):126-138 | DOI: 10.18267/j.cfuc.317

Analysis of Distortional Effects of Taxation on Financial and Investment Decision Based on the Methodology of Effective Tax Rates Calculation

Jaroslava Holečková

Doc. Ing. Jaroslava Holečková, Ph.D. - docentka; Katedra financí a oceňování podniku, Fakulta financí a účetnictví, Vysoká škola ekonomická v Praze, nám. W. Churchilla 4, 130 67 Praha 3; <jahol@vse.cz>.

The objective of this paper is to examine the use of effective tax rates on different types of capital assets and sources of financing and to assess on the base of calculation of the tax wedges the degree to which taxation affects the incentive to undertake investment. The methodology used to calculate effective tax rates on investments is based on an approach developed by the King and Fullerton methodology (1984), which has become the most widely accepted method adopted to calculating effective tax rates (tax wedges). The tax wedge will vary according to the type of asset: machinery, buildings, inventory and the type of finance sources: new equity, debt, retained earnings. Effective tax rates take into account not only the statutory corporate tax rate, but also other aspects of the tax system which determine the amount of tax paid and profitability of investment, a consideration of personal taxes. The tax system that seeks to raise revenue in ways that avoid distortion effects is considered neutral tax system. The aim of this article has been to assess on the base of calculation of the tax wedges the degree to which taxation affects the incentive to undertake investment in the Czech Republic (comparison in years 2000 and 2010).

Keywords: Effective tax rate; Tax wedge; Tax neutrality; Distortion effect

JEL classification: G30, H21

Published: June 1, 2012  Show citation