Working Paper: NBER ID: w9535
Authors: 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.
Keywords: Effective tax rate; Investment; Capital income tax
JEL Codes: H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| effective tax rate on new investment (F21) | revenue collected from capital income taxes (H24) |
| effective tax rate on new investment (F21) | omitted complications in tax law (K34) |
| tax policy (H20) | investment behavior (G11) |
| structure of the tax system (H20) | effective tax rate (H26) |
| nature of investment decisions (G11) | effective tax rate (H26) |