Issues in the Measurement and Interpretation of Effective Tax Rates

26 Pages Posted: 8 Jun 2004 Last revised: 13 Feb 2023

See all articles by David F. Bradford

David F. Bradford

Princeton University, Woodrow Wilson School; NBER; CESifo (Center for Economic Studies and Ifo Institute)

Charles Stuart

University of California, Santa Barbara (UCSB) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 1986

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.

Suggested Citation

Bradford, David F. and Stuart, Charles, Issues in the Measurement and Interpretation of Effective Tax Rates (July 1986). NBER Working Paper No. w1975, Available at SSRN: https://ssrn.com/abstract=227075

David F. Bradford (Contact Author)

Princeton University, Woodrow Wilson School ( email )

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Charles Stuart

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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