The Aborted Phase-in of Marginal Effective Corporate Tax Rates

Abstract

Although the statutory rate of tax on most corporate capital income is .46, the expected tax on a new investment under consideration can be quite different. In this article, we measure the effective corporate tax rate on a marginal investment in four different assets. We test the sensitivity of these results to alternative assumptions about inflation and the nominal interest rate. Effective tax rates under the 1980 law are compared to those under each transition period of the 1981 Tax Act and to those under the 1982 Tax Act. We find that, had the phase-in provisions of 1981 Act continued through 1986, all assets would have experienced substantial effective tax rate reductions. Autos and equipment would have benefited from larger declines in the effective tax rate than would public utility structures and other structures. Under the 1982 Act, however, the rates for autos, equipment, and public utility structures are higher than under 1981 law. In fact, under certain conditions, effective rates in 1982 are higher than they were in 1980.