Care must be taken in interpreting this result, however, because the marginal effective tax rate is influenced by many factors, not just changes in tax rules.
A measure of the long-run marginal impact of the Tax Reform Act on the marginal effective tax rate can be calculated by computing the user cost of capital for a single year under the two sets of tax rules, ignoring recapture provisions.
b The marginal effective tax rate for large banks before tax reform was calculated using a statutory tax rate of 46 percent and assumes that banks used the percentage method to calculate the loan loss allowance.
Thus, marginal effective tax rates are better suited to capture disincentives to investment.
5 See Bradford and Fullerton (1981) for a detailed discussion of the conceptual issues involved in measuring marginal effective tax rates.
Table 3 compares the marginal effective tax rates under the specific charge-off (small bank) method with that obtained using the experience reserve (large bank) method.
Among this group of provinces, Alberta's low marginal effective tax rate is directly associated with its low statutory income tax rate and the absence of capital and sales taxes; the other provinces achieve their apparent overall tax competitiveness by favouring slow-growth industries: manufacturing and forestry.
However, we do not know the degree to which mobility affects forward shifting of marginal effective tax rate inter-provincial differentials.
Table 1a: Marginal Effective Tax Rate on Capital Investment in Canada: 2009, by Industry and by Province Forestry Utility Construction Manufacturing Percent Canada 10.
Canada's marginal effective tax rate profile by 2013, based on legislated intentions of governments, will be 18.
The combined result of the above changes to business taxation would be to reduce our current projection for the 2013 marginal effective tax rate on capital by another half percentage point, and reduce the inter-industry and inter-assed tax distortions by more than 50 percent.
As an example, if provinces adopted a flat 10 percent personal income tax rate, the marginal effective tax rate on labour would fall from 45 percent to below 42 percent.