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State and Local Taxes and the Rate of Return on Nonfinancial Corporate Capital (revised as W0740)

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  • Martin Feldstein
  • James M. Poterba
Abstract
Although states and localities collect a substantial amount of revenue from corporate profits taxes and property taxes on corporate capital, these taxes have been inadequately reflected in previous calculations of the effective corporate tax rate and the pretax rate of return to corporate capital. The present study focuses on non-financial corporations and begins by estimating the profits taxes and property taxes which these corporations pay to state and local governments. These estimates are then used to calculate the pretax rate of return on non-financial corporate capital; the results suggest that the conventional omission of state-local property taxes leads to an understatement of this rate of return by about one percentage point. The effective tax rate on non-financial corporate profits is also computed, taking account of state-local taxes. These taxes amount to approximately sixteen percent of the pretax profits of non-financial corporations. The total effective tax rate on these corporations is shown to have risen substantially during the past two decades; it averaged more than seventy percent in the most recent five-year period. The series for the rate of return and effective tax rate are used to compute the real after-tax rate of return on non-financial corporate capital. The calculations show that this number has declined recently, reaching 2.3 percent in 1979. This is to be contrasted with after-tax returns of over five percent which prevailed during the mid-1960s.

Suggested Citation

  • Martin Feldstein & James M. Poterba, 1980. "State and Local Taxes and the Rate of Return on Nonfinancial Corporate Capital (revised as W0740)," NBER Working Papers 0508, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0508
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    References listed on IDEAS

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    1. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
    2. William D. Nordhaus, 1974. "The Falling Share of Profits," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 5(1), pages 169-218.
    3. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
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    Cited by:

    1. Gilbert E. Metcalf & Kevin A. Hassett, 1999. "Measuring The Energy Savings From Home Improvement Investments: Evidence From Monthly Billing Data," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 516-528, August.
    2. Feldstein, Martin & Seligman, Stephanie, 1981. "Pension Funding, Share Prices, and National Savings," Journal of Finance, American Finance Association, vol. 36(4), pages 801-824, September.
    3. Martin Feldstein, 1982. "Private Pensions as Corporate Debt," NBER Chapters, in: The Changing Roles of Debt and Equity in Financing U.S. Capital Formation, pages 75-90, National Bureau of Economic Research, Inc.
    4. S. Rao Aiyagari, 1990. "Deflating the case for zero inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 14(Sum), pages 2-11.

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