Tax Neutrality and Intangible Capital
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.
|Date of creation:||Nov 1987|
|Date of revision:|
|Publication status:||published as Tax Neutrality and Intangible Capital , Don Fullerton, Andrew B. Lyon. in Tax Policy and the Economy: Volume 2 , Summers. 1988|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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, vol. 86(2), pages 229-43.
- Don Fullerton & Andrew B. Lyon & Richard J. Rosen, 1983. "Uncertainty, Welfare Cost, and the 'Adaptability' of U.S. Corporate Taxes," NBER Working Papers 1239, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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.
- 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.
- 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.
- David F. Bradford, 1978. "Tax Neutrality and the Investment Tax Credit," NBER Working Papers 0269, National Bureau of Economic Research, Inc.
- Don Fullerton, 1983. "Which Effective Tax Rate?," NBER Working Papers 1123, National Bureau of Economic Research, Inc.
- Feldstein, Martin & Dicks-Mireaux, Louis & Poterba, James, 1983.
"The effective tax rate and the pretax rate of return,"
Journal of Public Economics,
Elsevier, vol. 21(2), pages 129-158, July.
- Martin Feldstein & James M. Poterba & Louis Dicks-Mireaux, 1981. "The Effective Tax Rate and the Pretax Rate of Return," NBER Working Papers 0740, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2430. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.