A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
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A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of Minnesot A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTta, St. PaulJoel Slenirod University of Michigan, Ann Arbor37497Revised January 31, 2003Presented at the CES-ifo Conference on Measuring the Effective Taxation of Capital, Venice, July 15-16, 2002.1A Neu Summary Measure of the Effective Tax Rate on InvestmentObjectivesTaxes on investment income have A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT become high-profile candidates for reduction or repeal, given their presumed negative effects on investment and growth. Given this policy focus, econA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
omists have put significant effort toward learning how tax systems in fact affect the incentive to invest, typically by measuring the effective tax raA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of Minnesot A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTd, summary measures of the effective tax rate on new investment are normally quite high/ On the other hand, the amount of revenue actually collected is apparently very low. For example, Gordon and Sleinrod (1988) (hereafter GS) estimated that in 1983 the U.S. tax system collected no revenue from tax A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTing capital income, while Gordon. Kalambokidis, and Slemrod (2001) (hereafter GKS) estimated that in 1995, the U.S. tax system collected approximatelyA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
S18 billion in revenue from corporate capital income, or just 4% of total corporate profits (equal to S441.5 billion in 1995 according to the EconomiA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of Minnesot A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTtment incentives, then this tax structure is hard to defend.2On the other hand, the low revenue figures for existing taxes on capital income could be consistent with a view that the U.S. tax system docs not discourage investment as severely as has been thought. The low revenue could reflect an effec A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTtive tax rate on new capital investment that is much lower than has conventionally been reported in the past. This would be the case if the low revenuA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
e figures provide more revealing information about the effective tax rate because they reflect complications in the tax law ignored in standard estimaA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of Minnesot A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTgenerated by inframarginal decisions, so it is not clear a priori how informative revenue collections are for this purpose.While GS (1988) and GKS (2001) estimated the revenue collected from U.S. capital income taxes, they did not convert those estimates into an effective tax rate measure. Our first A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT objective in this paper is to derive explicitly how these revenue figures can be used to estimate the effective lax rale on new investment.We start wA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
ith the simplest possible setting in section 1. with just a corporate tax and only equity finance. In this selling, we define an effective lax rale onA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of Minnesot A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTe resulting effec tive tax rate also equals one derived using the Feldstein and Summers (1979) (hereafter FS) approach that calculates an effec live tax rate equal to the ratio of3https://khothuvien.cori!corporate tax payments (plus any personal taxes on corporate dividend and interest payments) to A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTcorporate income. Next, we show how the estimates of the revenue collected from taxing capital income, using the procedures in GKS. can be used to meaA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
sure this same effective tax rate.In section 2, we then assess all three measures when we move beyond this initial model of investment incentives. AmoA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of Minnesot A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTcase of choice of organizational form, where it would overestimate the effective tax rate, the GKS measure is the only one that consistently equals the desired value. That it automatically captures the effects of such complications is an important strength of this approach to measuring the effective A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT tax rate. In the presence of these complications, the FS and KF measures as used in practice consistently overestimate the desired value for the effeA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
ctive tax rate, providing some help in reconciling the past evidence.In section 3, we explore some further complications that are not dealt with approA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of Minnesot A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENThtly taxed equity. The data in GS (1988) suggested that such debt arbitrage is a dominant reason why the revenue from existing taxes on capital income in the United States has been so low. With this complication introduced, we find that4https://khothuvien.cori!the GKS measure now underestimates the A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTeffective tax rate, while the KF and the FS measures (as used in practice) both overestimate it.We conclude in section 4 that the GKS approach provideA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
s a ver)' useful but not fail-safe approach for measuring the effective tax rate on new investment. This measure proves to be much more robust titan tA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of Minnesot A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTblind spot. Because it relies on ex post data on tax payments, it cannot be used to assess the effects of proposed changes in the existing law, and will not accurately reflect a recently changed law.Overall, our exploration of alternative measures of the effective tax rate on new investment leads US A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT to conclude that, in trying to reconcile (he high conventional measures of effective tax rates with the low revenue collected, that the actual effectA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
ive tax rate on new investment does seem to be much lower than existing measures suggest, due to various omitted complications.1. Effective Tax Rate MA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of Minnesot A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT that used in the seminal work by Hall and Jorgenson (1967). This model, based on the neoclassical theory of optimal asset accumulation, assumes perfect information, perfect competition, zero excess profits on the marginal investment, an unchanging tax law, and no5risk. Il also ignores any personal A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTtaxes on corporate-source income, abstracts from the use of debt finance, and assumes that the firm has sufficient profits to use all of the allowed cA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
redits and deductions in the earliest possible year.Hall and Jorgenson argue that a profit-maximizing firm will purchase a new-capital asset as long aA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of Minnesot A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTthe present discounted value of the returns on a marginal project just equals the acquisition cost. Normalizing the pre-tax price of the capital good to be one, we can write the single-period-equivalent maximization problem asMax f(K) ~(r+d)K.Here r is the discount rate and d is the rate of deprecia A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTtion of the capital goods, assumed to be exponential at rate d. The solution to this problem is characterized by the following condition for the margiA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENT
nal investment:-1f’(K)-d = r.Here f'-d is the annual net return to one unit of capital. In equilibrium, it exactly equals the marginal rate of return A NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of MinnesotA NEW SUMMARY MEASURE OF THE EFFECTIVE TAX RATE ON INVESTMENTRoger Gordon University of California, San DiegoLaura Kalambokidis University of MinnesotGọi ngay
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