Taxation of Corporate Capital Income: Tax Revenues vs. Tax Distortions

28 Pages Posted: 18 Aug 2004

See all articles by Roger H. Gordon

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: June 1981

Abstract

Since the average tax rate on corporate capital income is very high, economists often conclude that taxes have caused a substantial fall in corporate investment, a movement of capital into noncorporate uses, and a fall in personal savings. The combined efficiency costs of these distortions are believed to be very important. This paper attempts to show that when uncertainty and inflation are taken into account explicitly, taxation of corporate income leaves corporate investment incentives basically unaffected, in spite of the sizable tax revenues collected. In addition, in some plausible situations, such taxes can result in a gain in efficiency. The explanation for these surprising results is that the government, by taxing capital income, absorbs a certain fraction of both the expected return and the uncertainty in the return. While investors as a result receive a lower expected return, they also bear less risk when they invest, and these two effects are largely offsetting.

Suggested Citation

Gordon, Roger H., Taxation of Corporate Capital Income: Tax Revenues vs. Tax Distortions (June 1981). NBER Working Paper No. w0687. Available at SSRN: https://ssrn.com/abstract=349087

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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858-534-7040 (Fax)

Harvard University - Department of Economics ( email )

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United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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