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Many macroeconomic models of savings, investment and labour supply relate their behaviour to measures of effective marginal tax rates based on data that may not be fully comparable across countries; thus their results are potentially misleading guides to fiscal policy coordination. In Discussion Paper No. 866, Enrique Mendoza, Research Fellow Assaf Razin and Linda Tesar compute effective average taxation rates on consumption and factor incomes from data on revenues and national accounts for the G7 economies during 1965-88. They show that these are consistent with existing estimates of effective marginal tax rates and use them to highlight cross-country differences in tax policy and relate them to savings, investment, hours worked and unemployment. They find that marked fluctuations in taxes on labour and capital income and consumption have reflected policy changes in statutory taxes, credits and exemptions. Capital and consumption taxes displayed no trend, while labour taxes increased over time in all the countries. European countries taxed consumption and labour income more heavily than Japan or the US, while capital taxes have been higher in the US than elsewhere <196> except the UK and recently Japan. The large differences in tax systems identified for the mid-1960s also tended to disappear in later years for groups of countries. Mendoza, Razin and Tesar report that their estimated tax rates are broadly consistent with the predictions of neoclassical equilibrium models. Capital income taxes are negatively related to savings, while consumption and labour income taxes are negatively related to hours worked. Unemployment is also positively correlated with the labour income tax, as suggested by `natural rate' and wage-bargaining models. These relationships are stronger in panel tests that combine time-series and cross-sectional data, but they remain robust for the time-series of several individual countries, and these empirical regularities also apply with the use of either detrended or raw data. Computing Effective Tax Rates on Factor Incomes and Consumption: An International Macroeconomic Perspective Enrique G Mendoza, Assaf Razin and Linda L Tesar Discussion Paper No. 866, January 1994 (IM) |