Working Paper: NBER ID: w1975
Authors: David Bradford; Charles Stuart
Abstract: Marginal effective tax rates on investment that are derived from the user cost of capital are nowadays widely used practically to assess the effects of capital taxation. In this paper, we examine several troublesome issues in the construction and use of marginal effective tax rates and user costs of capital. Our comments fall into two classes. In the first are concerns about the adequacy of the current generation of models of capital-market equilibrium, into which marginal effective tax rates (user costs) are incorporated. In the second are concerns about the appropriateness of the assumption, implicit and nearly universal in marginal effective tax rate calculations, that investors expect a given tax code to remain unchanged forever. We show that effects of current changes in the law on expectations about future changes may undo or even reverse the effects predicted by traditionally calculated effective tax rates.
Keywords: effective tax rates; capital taxation; investment incentives
JEL Codes: H25; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax policy changes (H29) | Investor expectations about future policies (D84) |
| Wealth transfers due to tax policy changes (H23) | Investor expectations about future policies (D84) |
| Investor expectations about future policies (D84) | Current investment incentives (E22) |
| Tax policy changes (H29) | Current investment incentives (E22) |
| Wealth transfers due to tax policy changes (H23) | Current investment incentives (E22) |