OECD Taxation Working Papers

ISSN: 
2223-5558 (online)
http://dx.doi.org/10.1787/22235558
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Working papers from the Centre for Tax Policy and Administration of the OECD that cover the full range of the Centre’s work on taxation with the main focus on tax policy related issues.
 

Distinguishing between “normal” and “excess” returns for tax policy You or your institution have access to this content

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Author(s):
Hayley Reynolds1, Thomas Neubig2
Author Affiliations
  • 1: National Treasury, South Africa

  • 2: OECD, France

11 Nov 2016
Bibliographic information
No.:
28
Pages:
32
http://dx.doi.org/10.1787/5jln6jct58vd-en

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This paper explores the practical challenges tax policy analysts face when trying to apply differential taxation to “normal” and “excess” returns. The distinction between these two elements is being increasingly used in tax policy. The problem is that there is no clear definition for a “normal” return. While it is often equated to a risk-free return, or the return available on a ten-year government bond, many commentators agree that it should incorporate a risk element. The typical rationale for applying differential taxation stems from the desire to achieve neutral taxation, i.e. minimise the real economic responses of taxpayers due to the wedge taxation imposes between before-tax and after-tax returns. A set of important questions are raised for tax policy analysts to consider. Two crucial factors that make the distinction challenging are heterogeneity and uncertainty. Given the potential for unintended consequences, this is an important issue that warrants more discussion and thought.
 
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