The purpose of this chapter is to evaluate the usefulness of the cost of capital approach as a practical guide to tax reform. Auerbach and Jorgenson ( 1980) introduced the key concept, the marginal effective tax rate, early in the debate over the Economic Recovery Tax Act (ERTA) of 1981. They employed this concept as a means of comparing the tax burdens among different types of assets under the provisions for capital cost recovery ultimately incorporated into the 1981 Tax Act. Jorgenson and Sullivan ( 1981) extended this comparison to all assets in the classification presented in
The initial results of applying the cost of capital approach to the 1981 Tax Act had no effect on the final legislation. However, this approach spread very rapidly among the community of tax policy analysts, both inside and outside the US government. The initial impetus for the diffusion of the cost of capital approach was testimony by Jorgenson ( 1979a, 1979b) before the Committee on Finance of the US Senate on 22 October 1979 and the Committee on Ways and Means of the US House of Representatives on 14 November 1979.1 This testimony included the first presentation of marginal effective tax rates, based on the work of Auerbach and Jorgenson.
An important milestone in the diffusion of the cost of capital approach was provided by the Conference on Depreciation, Inflation, and the Taxation of Income from Capital, held at the Urban Institute in Washington, DC, on 1 December 1980. The participants in this conference included tax analysts from universities, research institutions, the US Department of the Treasury, and the staff of the US Congress. Key papers in the implementa-____________________