The Effective Tax Rate and the Pretax Rate of Return

46 Pages Posted: 18 Aug 2004 Last revised: 12 Jul 2010

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER); Harvard University

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Louis Dicks-Mireaux

National Bureau of Economic Research (NBER)

Date Written: August 1981

Abstract

This paper presents new estimates of the taxes paid on nonfinancial corporate capital, on the pretax rate of return to capital, and on the effective tax rate. The basic time series show that both the pretax rate of return and the effective tax rate have varied substantially in the past quarter century. An explicit analysis indicates that, after adjusting for different aspects of the business cycle, pretax profitability was between one and 1.5 percentage points lower in the 1970's than in the 1960's. The rate of profitability in the 1960's was also about one-half of a percentage point greater than the profitability in the 7 years of the 1950's after the Korean war. Changes in productivity growth, in inflation, in relative unit labor costs, and in other variables are all associated with changes in profitability. None of these variables, however, can explain the differences in profitability between the 1950Ts, 1960's and 1970's. Looking at broad decade averages, the effective tax rate and the pretax rate of return move in opposite directions, higher pretax profits occurring when the tax rate is high. There thus appears to have been no tendency for pretax profits to vary in a way that offsets differences in effective tax rates.

Suggested Citation

Feldstein, Martin S. and Poterba, James M. and Dicks-Mireaux, Louis, The Effective Tax Rate and the Pretax Rate of Return (August 1981). NBER Working Paper No. w0740. Available at SSRN: https://ssrn.com/abstract=349129

Martin S. Feldstein (Contact Author)

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James M. Poterba

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Louis Dicks-Mireaux

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