Measurement and Allocation of Capital Inputs With Taxes: A Sensitivity Analysis for OECD Countries

Abstract

Taxes affect the measurement of capital inputs. The paper provides an assessment of these impacts in a cross-country framework where heterogeneity of corporate taxation across industries and asset types is accounted for. The results show that taxes change the relative prices of capital types, which, in turn, has implications on the estimated capital quality and reallocation effects in the traditional growth accounting framework. Omitting tax parameters is a source of mismeasurement, particularly when the rental price of capital assets is constructed using an external rate of return, leading to biased capital costs and profits rates. It is shown that differential taxation results in a deadweight loss in terms of misallocated capital inputs, predominantly due to composition effects within industries.