Tax Reform and the Cost of Capital

By Dale W. Jorgenson; Kun-Young Yun | Go to book overview

3 The US Tax System

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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Tax Reform and the Cost of Capital
Table of contents

Table of contents

  • Title Page iii
  • Foreword v
  • Preface vii
  • Contents xiii
  • Tables xv
  • 1 - Introduction 1
  • 2 - Taxation of Income from Capital 17
  • 3 - The US Tax System 39
  • 4 - Effective Tax Rates 110
  • 5 - Summary and Conclusion 153
  • References 166
  • Author Index 176
  • Subject Index 178
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