weighted average of the four kinds of enterprise income tax treatments, five types of fixed assets, three kinds of enterprise income tax treatments, five types of fixed assets, and three methods of investment financing.
Our estimated results show that the provisions on enterprise income tax in SEI achieved the purpose of imposing different tax rates on different industries. The cost of capital financed by debt is lower than by other methods. No matter how it is financed, the cost of capital and the effective tax rate are sensitive to the discount rate. Because the discount rate was high, the introduction of a tax incentive scheme did not reduce the cost of capital very much. The effective tax rate shows that the tax structure was more discriminatory in the 1980s than in other years and reflects the changes in incentive schemes that its counterpart, the double taxation rate, does not include.
There is room for improvement and further research. Assumptions about the depreciation rate and the tax rate on capital gains need to be reexamined. It is important to incorporate the import-duty exemption into the cost-of-capital formula because the tariff rates in Taiwan were high in the 1960s and 1970s. Also, a careful comparison of the costs of capital and effective tax rates among different countries estimated by the same methods may shed light on the source of capital formation and productivity. Econometric studies of the effects of the cost of capital on investment expenditure would also be helpful in telling us how successful the tax policy has been in stimulating capital formation in Taiwan.
The authors are indebted to Richard A. Musgrave, Keimei Kaizuka, Chu-wei Tseng, Ching-huei Chang and Chung-lin Hsieh for discussions and comments. We would like to express our appreciation to Wen-rong Lien for his calculation and to Show-ming Wang for typing the manuscript for this chapter.
Another condition necessary is δVt/δLt+i, which yields the marginal product of labor to the real wage rate. See Intriligator ( 1971). For the treatment of investment in discrete terms, see Brechling ( 1975).