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The Effective Tax Rate and the Pretax Rate of Return

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  • Martin Feldstein
  • James M. Poterba
  • Louis Dicks-Mireaux

Abstract

This paper presents new estimates of the taxes paid on nonfinancial corporate capital, on the pretax rate of return to capital, and on the effective tax rate. The basic time series show that both the pretax rate of return and the effective tax rate have varied substantially in the past quarter century. An explicit analysis indicates that, after adjusting for different aspects of the business cycle, pretax profitability was between one and 1.5 percentage points lower in the 1970's than in the 1960's. The rate of profitability in the 1960's was also about one-half of a percentage point greater than the profitability in the 7 years of the 1950's after the Korean war. Changes in productivity growth, in inflation, in relative unit labor costs, and in other variables are all associated with changes in profitability. None of these variables, however, can explain the differences in profitability between the 1950Ts, 1960's and 1970's. Looking at broad decade averages, the effective tax rate and the pretax rate of return move in opposite directions, higher pretax profits occurring when the tax rate is high. There thus appears to have been no tendency for pretax profits to vary in a way that offsets differences in 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 0740.

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Date of creation: Aug 1981
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Publication status: published as Feldstein, Martin, Louis Dicks-Mireaux, and James Poterba. "The Effective Tax Rate and the Pretax Rate of Return." Journal of Public Economics, Vol. 21, No. 2, pp. 129-158, (1983). (NOTE: Reprint 443 is based on BOTH W0508 and W0740.)
Handle: RePEc:nbr:nberwo:0740

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  1. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
  2. Martin Feldstein & Lawrence Summers, 1977. "Is the Rate of Profit Falling?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 211-228.
  3. Michael Bruno & Jeffrey Sachs, 1979. "Macro-Economic Adjustment With Import Price Shocks: Real and Monetary Aspects," NBER Working Papers 0340, National Bureau of Economic Research, Inc.
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