A New Summary Measure of the Effective Tax Rate on Investment

57 Pages Posted: 8 Mar 2003 Last revised: 31 Oct 2010

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)

Laura Kalambokidis

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Date Written: March 2003

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.

Suggested Citation

Gordon, Roger H. and Kalambokidis, Laura and Slemrod, Joel B., A New Summary Measure of the Effective Tax Rate on Investment (March 2003). NBER Working Paper No. w9535. Available at SSRN: https://ssrn.com/abstract=386164

Roger H. Gordon

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

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-4828 (Phone)
858-534-7040 (Fax)

Harvard University - Department of Economics ( email )

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United States

Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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Laura Kalambokidis

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics ( email )

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St. Paul, MN 55108-1995
United States

Joel B. Slemrod (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

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Ann Arbor, MI 48109-1234
United States
734-936-3914 (Phone)
734-763-4032 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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