Issues in the Measurement and Interpretation of Effective Tax Rates

David F. Bradford, Charles Stuart

NBER Working Paper No. 1975 (Also Reprint No. r0803)
Issued in July 1986
NBER Program(s):Public Economics

Marginal effective tax rates on investment that are derived from the user cost of capital are nowadays widely used practically to assess the effects of capital taxation. In this paper, we examine several troublesome issues in the construction and use of marginal effective tax rates and user costs of capital. Our comments fall into two classes. In the first are concerns about the adequacy of the current generation of models of capital-market equilibrium, into which marginal effective tax rates (user costs) are incorporated. In the second are concerns about the appropriateness of the assumption, implicit and nearly universal in marginal effective tax rate calculations, that investors expect a given tax code to remain unchanged forever. We show that effects of current changes in the law on expectations about future changes may undo or even reverse the effects predicted by traditionally calculated effective tax rates.

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Document Object Identifier (DOI): 10.3386/w1975


  • Bradford, David and Charles Stuart. "Issues in the Measurement and Interpretation of Effective Tax Rates." National Tax Journal, Vol. 39, No. 3, (September 1986), pp. 307-316.
  • "Saving and Capitla Formation in the United States and Ohter Industrila Countries" 1987, Chapter 2 in Robert Lipsey and Irving Kravis's: Saving and Economics Growth: Is the U.S. Really Falling Behind?; New York, The conference Board.

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