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Pitfalls in the Construction and Use of Effective Tax Rates

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  • David F. Bradford
  • Don Fullerton

Abstract

A cost of capital formula can be a useful tool in estimating the effective tax rate on a dollar of marginal investment in a particular industry. There are a number of procedural issues, however, which can greatly affect the resulting estimates. First, tax rate estimates vary with the interest rate used in the formula. Second, the nonlinearity of tax rate formulas may lead to anomalous results. For example, an investment that is actually subsidized may appear to bear a positive tax. Or, tax rates may become arbitrarily large when the project's rate of return approaches zero. Third, effective tax rate results depend on the assumed relationship between inflation and nominal interest rates. Our conclusion is that much sensitivity analysis and specificity are required in studies that undertake to estimate effective tax rates.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0688.

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Date of creation: Aug 1982
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Handle: RePEc:nbr:nberwo:0688

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References

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  1. Don Fullerton & Roger H. Gordon, 1983. "A Reexamination of Tax Distortions in General Equilibrium Models," NBER Working Papers 0673, National Bureau of Economic Research, Inc.
  2. Martin Feldstein & Lawrence H. Summers, 1979. "Inflation, Tax Rules, and the Long Term Interest Rates," NBER Working Papers 0232, National Bureau of Economic Research, Inc.
  3. Martin Feldstein & Lawrence H. Summers, 1979. "Inflation and the Taxation of Capital Income in the Corporate Sector," NBER Working Papers 0312, National Bureau of Economic Research, Inc.
  4. Fullerton, Don, et al, 1981. "Corporate Tax Integration in the United States: A General Equilibrium Approach," American Economic Review, American Economic Association, vol. 71(4), pages 677-91, September.
  5. Shoven, John B, 1976. "The Incidence and Efficiency Effects of Taxes on Income from Capital," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1261-83, December.
  6. Roger H. Gordon, 1981. "Taxation of Corporate Capital Income: Tax Revenues vs. Tax Distortions," NBER Working Papers 0687, National Bureau of Economic Research, Inc.
  7. Joseph E. Stiglitz, 1981. "On the Almost Neutrality of Inflation: Notes on Taxation and the Welfare Costs of Inflation," NBER Working Papers 0499, National Bureau of Economic Research, Inc.
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Cited by:
  1. Roger H. Gordon & James R. Hines Jr. & Lawrence H. Summers, 1987. "Notes on the Tax Treatment of Structures," NBER Working Papers 1896, National Bureau of Economic Research, Inc.
  2. Raquel Paredes Gómez, 2006. "The Evolving Role of the Corporate Income Tax in Spain," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0605, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Kevin S. Markle & Douglas A. Shackelford, 2011. "Cross-Country Comparisons of Corporate Income Taxes," NBER Working Papers 16839, National Bureau of Economic Research, Inc.
  4. Niemann, Rainer & Bachmann, Mark & Knirsch, Deborah, 2002. "Was leisten die Effektivsteuersätze des European Tax Analyzer?," Tübinger Diskussionsbeiträge 241, University of Tübingen, School of Business and Economics.
  5. Fullerton, Don & Henderson, Yolanda Kodrzycki, 1985. "Long-run Effects of the Accelerated Cost Recovery System," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 363-72, August.
  6. Julie Collins & Douglas Shackelford, 1995. "Corporate domicile and average effective tax rates: The cases of Canada, Japan, the United Kingdom, and the United States," International Tax and Public Finance, Springer, vol. 2(1), pages 55-83, February.

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