By Dale W. Jorgenson;Kun-Young Yun
The price of capital was once brought nearly thirty years in the past and fast grew to become an critical instrument for modelling the impression of tax coverage on funding habit. in the prior decade, the price of capital has assumed a imperative function in tax reform debates throughout the heavily similar notion of the marginal potent tax expense. This publication presents a complete remedy of the price of capital method of tax coverage research. preserving the analytical point of this paintings has been stored to a minimal, the authors introduce complexities in a step-by-step style, top as much as a illustration of tax structures for capital source of revenue that's compatible for tax coverage research. The luck of the price of capital technique is due largely to its skill to assimilate a nearly limitless volume of descriptive element on substitute tax rules. to supply suggestions to scholars and tax coverage pros, this e-book includes a complete implementation of the technique for the us, together with an research of the choice proposals that culminated within the hugely influential Tax Reform Act of 1986 within the usa. It additionally describes possibilities for extra study and offers a whole and up to date bibliography to the speedily increasing literature. this is often the 1st in a chain of Lectures in financial and monetary coverage at Uppsala college in honor of Erik Lindahl.
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Extra info for Tax Reform and the Cost of Capital (Lindahl Lectures on Monetary and Fiscal Policy)
Sample text
The denominator of the first term in the rental price of capital services represents the after-tax proportion of non-corporate income from capital at the tax rate . Second, the price of investment goods is reduced by the investment tax credit km and the present value of tax deductions for capital consumption . Third, the rental price includes the property tax rate , net of the value of tax deductions at the tax rate . Fourth, the rate of return includes the rate of interest, also net of tax deductions .
We can introduce personal income taxes on distributions of corporate income through the portfolio equilibrium of holders of equity in corporate business. 24) and is the tax rate on capital gains accrued on corporate equity at the personal level. This rate reflects the favourable treatment of capital gains relative to ordinary income. 25) As before, we model provisions for capital consumption allowances and the investment tax credit under the US corporate income tax as equivalent reductions in the acquisition price of investment goods.
22) This after-tax rate of return represents the compensation of the holders of the non-corporate firm's debt and equity after all taxes have been paid. Finally, we define the tax wedge on non-corporate assets as the difference between social and private tax rates of return. 11) above. As before, we can define tax wedges and effective tax rates for equity- or debt-financed investments in the noncorporate sector separately by replacing the private rate of return by the rate of return on equity ρt or the after-tax rate of interest in the definitions of the tax wedge and the effective tax rate.