How Taxes Affect Economic Behavior

By Henry J. Aaron; Joseph A. Pechman | Go to book overview

Appendix A: Glossary of Symbols
Symbol Definition
c Implicit tax rate on accrued capital gains
c(D/K) Increase in annual bankruptcy costs caused by an increase in
the firm's debt-capital ratio as a result of the replacement of a
dollar of equity with a dollar of debt
CD Increase in annual bankruptcy costs resulting from a dollar of
debt-financed real investment
CE Increase in annual bankruptcy costs resulting from a dollar of
equity-financed real investment
di Rate of return on the ith security through dividends taxable to
the individual at ordinary rates
dM Rate of return on the market portfolio through dividends tax-
able to the individual at ordinary rates
gi Return on the ith security taxable at capital gains rates
gM Return on the market portfolio taxable at capital gains rates
m Marginal tax rate on interest income for an individual
n Marginal tax rate on dividends for an individual
p Percent of a firm's after-tax profits paid out as dividends
q Stock market valuation of the present value of returns from a
dollar of marginal real investment
r Market interest rate on corporate bonds
rf Market interest rate on tax-exempt bonds
rz Riskless market interest rate
s Pretax marginal return on capital (after depreciation and ex-
penses)
α Ratio of after-tax value of a dollar of dividends to the after-
tax value of a dollar of capital gains in the stock market
αb Ratio of after-tax value of a dollar of interest receipts to the
after-tax value of a dollar of capital gains in the stock market
βi Riskiness of the ith security, measured as
γ Percent of debt finance used to finance new investments
δ Before-tax risk premium on the uncertain returns from a dol-
lar of real investment
ε Stochastic element, with mean zero, in the return on a dollar
of real investment
τ Corporation income tax rate

-183-

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