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A New Summary Measure of the Effective Tax Rate on Investment

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  • Roger Gordon
  • Laura Kalambokidis
  • Joel Slemrod

Abstract

The empirical literature that seeks to measure the effective tax rate on new investment offers a striking paradox. On the one hand, summary measures of the effective tax rate on new investment are normally quite high. On the other hand, the amount of revenue actually collected from taxing capital income is apparently very low. In this paper we derive explicitly how revenue figures (under the existing system and under a hypothetical R-base tax) can be used to construct an estimate of the true effective tax rate on capital income, and how this measure and existing measures are affected by several factors, including resale of assets (churning), risk, pure profits, debt finance and arbitrage, and choice of organizational form.We conclude that our new methodology provides a very useful, but not fail-safe, approach for measuring the effective tax rate on new investment. It is much more robust than the standard measures, such as King-Fullerton marginal effective tax rates complications in the tax law. In trying to reconcile the high conventional measures of the effective tax rate with the low revenue collected, we conclude that the effective tax rate does seem to be much lower than existing measures suggest.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9535.

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Date of creation: Mar 2003
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Publication status: published as Sorensen, Peter Birch (ed.) Measuring the tax burden on capital and labor CESifo Seminar Series. Cambridge and London: MIT Press, 2004.
Handle: RePEc:nbr:nberwo:9535

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  1. Michael Devereux & Rachel Griffith, 1998. "The taxation of discrete investment choices," IFS Working Papers, Institute for Fiscal Studies W98/16, Institute for Fiscal Studies.
  2. Gordon, Roger H & Wilson, John Douglas, 1989. "Measuring the Efficiency Cost of Taxing Risky Capital Income," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 427-39, June.
  3. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(3), pages 433-46, August.
  4. Roger H. Gordon & Joel Slemrod, 1983. "A General Equilibrium Simulation Study of Subsidies to Municipal Expenditures," NBER Working Papers 1080, National Bureau of Economic Research, Inc.
  5. 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.
  6. Joel Slemrod, 2001. "A General Model of the Behavioral Response to Taxation," International Tax and Public Finance, Springer, Springer, vol. 8(2), pages 119-128, March.
  7. Gordon, Roger H. & Lee, Young, 2001. "Do taxes affect corporate debt policy? Evidence from U.S. corporate tax return data," Journal of Public Economics, Elsevier, Elsevier, vol. 82(2), pages 195-224, November.
  8. Roger H. Gordon & Joel Slemrod, 1988. "Do We Collect Any Revenue from Taxing Capital Income?," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 89-130 National Bureau of Economic Research, Inc.
  9. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
  10. Roger H. Gordon & James R. Hines Jr., 2002. "International Taxation," NBER Working Papers 8854, National Bureau of Economic Research, Inc.
  11. Joseph E. Stiglitz, 1983. "Some Aspects of the Taxation of Capital Gains," NBER Working Papers 1094, National Bureau of Economic Research, Inc.
  12. Roger H. Gordon & Laura Kalambokidis & Joel Slemrod, 2003. "Do We Now Collect Any Revenue From Taxing Capital Income?," NBER Working Papers 9477, National Bureau of Economic Research, Inc.
  13. B. Douglas Berhheim, 1991. "Tax Policy and the Dividend Puzzle," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 455-476, Winter.
  14. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(1), pages 20-39, February.
  15. David F. Bradford, 1979. "The Incidence and Allocation Effects of a Tax on Corporate Distributions," NBER Working Papers 0349, National Bureau of Economic Research, Inc.
  16. 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.
  17. Harry Grubert & Joel Slemrod, 1994. "The Effect of Taxes on Investment and Income Shifting to Puerto Rico," NBER Working Papers 4869, National Bureau of Economic Research, Inc.
  18. Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, Econometric Society, vol. 51(3), pages 611-36, May.
  19. Joseph E. Stiglitz, 1986. "The General Theory of Tax Avoidance," NBER Working Papers 1868, National Bureau of Economic Research, Inc.
  20. Don Fullerton, 1983. "Which Effective Tax Rate?," NBER Working Papers 1123, National Bureau of Economic Research, Inc.
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