TY  - JOUR
AU  - Bradford,David F.
AU  - Fullerton,Don
TI  - Pitfalls in the Construction and Use of Effective Tax Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 688
PY  - 1982
Y2  - August 1982
UR  - http://www.nber.org/papers/w0688
L1  - http://www.nber.org/papers/w0688.pdf
N1  - Author contact info:
David F. Bradford
Woodrow Wilson School
Princeton University
Princeton, NJ 08544-1013
Tel: 609/258-1856
Fax: 609/258-2809
E-Mail: BRADFORD@PRINCETON.EDU

Don Fullerton
Department of Finance
University of Illinois
BIF Box#30 (MC520)
515 East Gregory Drive
Champaign, IL  61820
Tel: 217/244-3621
Fax: 217/244-3102
E-Mail: dfullert@illinois.edu
AB  - A cost of capital formula can be a useful tool in estimating the effective tax rate on a dollar of marginal investment in a particular industry. There are a number of procedural issues, however, which can greatly affect the resulting estimates. First, tax rate estimates vary with the interest rate used in the formula. Second, the nonlinearity of tax rate formulas may lead to anomalous results. For example, an investment that is actually subsidized may appear to bear a positive tax. Or, tax rates may become arbitrarily large when the project's rate of return approaches zero. Third, effective tax rate results depend on the assumed relationship between inflation and nominal interest rates. Our conclusion is that much sensitivity analysis and specificity are required in studies that undertake to estimate effective tax rates.
ER  -