There are two version of the Markle and Shackelford paper. The original NBER working paper – quoted by the Henry Review and Wayne Swan – and a revised updated version. It is interesting to compare the two.
To remind ourselves here is the original table 4 – the table that is at the centre of the controversy.
Have a good look – see the mining column. Now have a good look at the new table 4.
Look at the mining column now. Despite the fact that the sample size has increased (the R2 is down) Australia no longer has any estimates for the mining ETR. Canada’s estimated mining ETR is down from 17 percent (for both domestic and multinationals) to 8 percent. So the revised paper is no help at all the Rudd government. You’ve got to wonder why they dropped Australian mining from the analysis?
One of my earlier criticisms of the paper – actually how the Rudd government and the Henry Report used the paper, I think the paper itself is good – related to cross-regression comparisons.
It seems that the table is best interpreted up and down the columns and not across the rows. Across the rows are results from different regressions and the results should not really be compared to each other. Markle and Shackelford do not test to see if the estimates are statistically different across the rows so we can’t really know if they are or are not. When looking across the rows we are not comparing apples with apples. Given the difference in firm characteristics across industries do we expect all firms to have the same effective tax rate? I would think not. (It is true that Markle and Shackelford do comment briefly on the variatuon across industries within the US, but they don’t make much of that issue). In order to test whether the different industries have significantly different effective marginal tax rates Markle and Shackelford would have to re-estimate their equation and interact the country and industry variables. I don’t know if they have done that exercise but they certainly do not report the results of an exercise like that in their paper.
They haven’t done what I suggest, but they have done something slightly different; they calculate the coefficient of variation for each country’s industry ETRs and compare those. This is how they report their results (emphasis added)
Countries differ substantially in the extent to which ETRs vary across their industries. For example, the spread from highest ETR in Australia (Transportation at 24%) to the lowest ETRs (Finance and Professional at 16%) is only eight percentage points. Conversely, the spread is 25 percentage points in the U.S. (from Mining at 7% to Construction at 32%). Using the coefficient of variation for each country’s industry ETRs as a standardized measure of the spread, we find that Australia at 14% and the U.K. at 20% have the least variation among industry ETRs. The Cayman Islands (49%), Malaysia (46%), China (45%), India (44%) and the U.S. (36%) have the most variation across industry. These findings suggest that Australian and British tax law have fewer industry-specific provisions than do the tax laws in the countries with greater industry ETR variation.
Contrast that with what Swan said in his Economic Note.
It’s also the case that mining companies operating in Australia get a big discount on the company tax they pay because of very generous tax concessions they get at the expense of Australian taxpayers.
That statement is not consistent with the revised version of the paper.