Tax Reform and the Cost of Capital

Tax Reform and the Cost of Capital

Tax Reform and the Cost of Capital

Tax Reform and the Cost of Capital

Synopsis

The Lindahl Lectures, inaugurated by the University of Uppsala on Monetary and Fiscal Policy, are given every two years in honour of Erik Lindahl, a distinguished Swedish economist. Tax Reform and the Cost of Capital, the first set of lectures in the series, surveys the new theoretical links between monetary theory and public finance. The book is divided into three sections: the cost of capital; the cost of elasticities and the costs of reform; and the trade-off between equity and efficiency.

Excerpt

The purpose of this chapter is to provide a quantitative description of the US tax system. We first estimate income and property tax rates at both corporate and individual levels. Our estimates of corporate income tax rates are based on statutory rates at federal and at state and local levels. We take into account the fact that state and local tax payments are treated as deductions from revenue in defining corporate income at the federal level. We represent the corporate income tax as a flat rate tax, so that corporate tax liabilities are simply proportional to corporate income.

By contrast with the corporate income tax, liabilities under the individual income tax are a steadily rising proportion of the income of each taxpayer. Accordingly, we can say that the individual income tax is progressive at both federal and state and local levels. State and local personal income tax payments are deducted from revenue in defining individual income for tax purposes at the federal level. We employ the concept of the average marginal tax rate to summarize the progressive rate schedules for the individual income tax. We estimate average marginal tax rates under the individual income tax by assuming that the amounts of income subject to tax at various marginal rates will increase or decrease in the same proportion.

In order to estimate average marginal tax rates on individual income from debt and equity, we distinguish among alternative forms of legal ownership by individuals. This makes it possible to incorporate differences in the tax treatment of different types of income such as dividends and interest. We first estimate the average marginal tax rate by type of income and form of ownership. Then in Section 3.2 we determine the distribution of financial claims on assets among ownership categories from the US Flow of Funds Accounts. In the following chapter we compute average marginal tax rates as a weighted average of the corresponding tax rates for all ownership categories, using the distribution of financial claims as weights.

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