Tax Neutrality and Intangible Capital

Don Fullerton, Andrew B. Lyon

NBER Working Paper No. 2430 (Also Reprint No. r1171)
Issued in November 1987
NBER Program(s):Public Economics

Many studies measure capital stocks and effective tax rates for different industries, but they consider only tangible assets such as equipment, structures, inventories, and land. Some of these studies also have estimated that the welfare cost of tax differences among these assets under prior law is about $10 billion per year or 13 percent of all corporate income tax revenue. Since the investment tax credit was available only for equipment, its repeal raises the effective rate of taxation of equipment toward that of other assets and virtually eliminates this welfare cost. However, firms also own intangible assets such as trademarks, copyrights, patents, a good reputation, or general production expertise. This paper provides alternative measures of the intangible capital stock, and it investigates implications for distortions caused by taxes. The existence of intangible capital markedly alters welfare cost calculations. Investments in advertising and R&D are expensed, so the effective rate of tax on these assets is less than that on equipment under prior law. With large differences between these assets and other tangible assets, we find that the welfare cost measure under prior law increases to $13 billion per year. Repeal of the investment credit taxes equipment more like other tangible assets but less like intangible assets. The welfare cost still falls, to about $7 billion per year, but it is no longer "virtually eliminated." With additional sources of intangible capital, credit repeal could actually increase welfare costs. Finally, however, the Tax Reform Act of 1986 not only repeals the investment tax credit but reduces rates as well. Efficiency always increases in this model because the taxation of tangible assets is reduced toward that of intangible assets.

download in pdf format
   (316 K)

download in djvu format
   (227 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w2430

Published: Tax Neutrality and Intangible Capital, Don Fullerton, Andrew B. Lyon. in Tax Policy and the Economy: Volume 2, Summers. 1988

Users who downloaded this paper also downloaded* these:
Fullerton and Lyon Tax Neutrality and Intangible Capital
Bradford w0269 Tax Neutrality and the Investment Tax Credit
Mutti and Grubert w13248 The Effect of Taxes on Royalties and the Migration of Intangible Assets Abroad
Fullerton w1655 The Indexation of Interest, Depreciation, and Capital Gains: A Model ofInvestment Incentives
Buiter w2673 Debt Neutrality, Professor Vickrey and Henry George's "Single Tax"
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us