Issues in the Measurement and Interpretation of Effective Tax Rates
David F. Bradford
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 connnents 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.
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