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Tax Neutrality and Intangible Capital

In: Tax Policy and the Economy: Volume 2

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  • Don Fullerton
  • Andrew B. Lyon

Abstract

Many studies measure capital stocks and effective tax rates for different industries, but they consider only tangible assets such as equipment, structures, inventories, and land. Some of these studies also have estimated that the welfare cost of tax differences among these assets under prior law is about $10 billion per year or 13 percent of all corporate income tax revenue. Since the investment tax credit was available only for equipment, its repeal raises the effective rate of taxation of equipment toward that of other assets and virtually eliminates this welfare cost. However, firms also own intangible assets such as trademarks, copyrights, patents, a good reputation, or general production expertise. This paper provides alternative measures of the intangible capital stock, and it investigates implications for distortions caused by taxes. The existence of intangible capital markedly alters welfare cost calculations. Investments in advertising and R&D are expensed, so the effective rate of tax on these assets is less than that on equipment under prior law. With large differences between these assets and other tangible assets, we find that the welfare cost measure under prior law increases to $13 billion per year. Repeal of the investment credit taxes equipment more like other tangible assets but less like intangible assets. The welfare cost still falls, to about $7 billion per year, but it is no longer "virtually eliminated." With additional sources of intangible capital, credit repeal could actually increase welfare costs. Finally, however, the Tax Reform Act of 1986 not only repeals the investment tax credit but reduces rates as well. Efficiency always increases in this model because the taxation of tangible assets is reduced toward that of intangible assets.

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This chapter was published in:

  • Lawrence H. Summers, 1988. "Tax Policy and the Economy: Volume 2," NBER Books, National Bureau of Economic Research, Inc, number summ88-2, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10937.

    Handle: RePEc:nbr:nberch:10937

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    References

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    1. Don Fullerton, 1983. "Which Effective Tax Rate?," NBER Working Papers 1123, National Bureau of Economic Research, Inc.
    2. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    3. Barry P. Bosworth, 1985. "Taxes and the Investment Recovery," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 1-45.
    4. David F. Bradford, 1978. "Tax Neutrality and the Investment Tax Credit," NBER Working Papers 0269, National Bureau of Economic Research, Inc.
    5. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
    6. Fullerton, Don & Lyon, Andrew B & Rosen, Richard J, 1984. " Uncertainty, Welfare Cost and the "Adaptability" of U.S. Corporate Taxes," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 86(2), pages 229-43.
    7. Roger H. Gordon & James R. Hines Jr. & Lawrence H. Summers, 1986. "Notes on the Tax Treatment of Structures," NBER Working Papers 1896, National Bureau of Economic Research, Inc.
    8. Mervyn A. King & Don Fullerton, 1983. "The Taxation of Income from Capital: A Comparative Study of the U.S., U.K., Sweden, and West Germany--The Theoretical Framework--," NBER Working Papers 1058, National Bureau of Economic Research, Inc.
    9. Feldstein, Martin & Dicks-Mireaux, Louis & Poterba, James, 1983. "The effective tax rate and the pretax rate of return," Journal of Public Economics, Elsevier, Elsevier, vol. 21(2), pages 129-158, July.
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    Cited by:
    1. Bronwyn H. Hall, 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," NBER Working Papers 4096, National Bureau of Economic Research, Inc.
    2. Berkovec, James & Fullerton, Don, 1992. "A General Equilibrium Model of Housing, Taxes, and Portfolio Choice," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(2), pages 390-429, April.
    3. Bronwyn Hall, 2006. "R&D, productivity and market value," IFS Working Papers, Institute for Fiscal Studies W06/23, Institute for Fiscal Studies.
    4. Andrew B. Lyon, 1989. "Understanding Investment Incentives Under Parallel Tax Systems: An Application to the Alternative Minimum Tax," NBER Working Papers 2912, National Bureau of Economic Research, Inc.
    5. Conesa, Juan C. & Domínguez, Begoña, 2013. "Intangible investment and Ramsey capital taxation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(8), pages 983-995.
    6. Lawrence H. Goulder, 1989. "Tax Policy, Housing Prices, and Housing Investment," NBER Working Papers 2814, National Bureau of Economic Research, Inc.
    7. Patric H. Hendershott, 1988. "The Tax Reform Act Of 1986 And Economic Growth," NBER Working Papers 2553, National Bureau of Economic Research, Inc.
    8. Berkovec, James & Fullerton, Don, 1989. "The General Equilibrium Effects of Inflation on Housing Consumption and Investment," American Economic Review, American Economic Association, American Economic Association, vol. 79(2), pages 277-82, May.
    9. Estelle P. Dauchy, 2013. "The Efficiency Cost of Asset Taxation in the U.S. after Accounting for Intangible Assets," Working Papers w0199, Center for Economic and Financial Research (CEFIR).
    10. Fullerton, Don & Karayannis, Marios, 1994. "Tax evasion and the allocation of capital," Journal of Public Economics, Elsevier, Elsevier, vol. 55(2), pages 257-278, October.
    11. Robinson, Leslie A. & Sansing, Richard, 2008. "The effect of "invisible" tax preferences on investment and tax preference measures," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 46(2-3), pages 389-404, December.

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