Tax Reform and the Cost of Capital: An International Comparison.

• Author: Windsor, Duane

This volume of ten essays by leading tax experts from various countries presents the latest research on capital income taxation in nine key industrialized democracies. This indispensable reference work provides detailed comparative information on marginal effective tax rates by country by type of capital asset for 1980, 1985 and 1990, an index, a good working bibliography in the form of the separate chapter references, an introductory chapter by Jorgenson explaining the issues and findings, and a methodological appendix to that chapter by Jorgenson explaining the Jorgenson cost of capital [2] and marginal effective tax rate [1; 3] concepts (the latter refining Harberger's notion of the effective tax rate) and the King-Fullerton framework [4] for calculating the cost of various types of capital.

The essays study the relationship between tax policy and the cost of different types of capital in the "Group of Seven" (G-7) industrialized nations (Canada, France, Germany, Italy, Japan, U.K., U.S.) along with Australia and Sweden. Many of these countries experienced major tax reform efforts in the 1980s. Each country is the subject of a chapter by specialists. (King is coauthor of the U.K. essay; Fullerton is coauthor of the U.S. essay.) The reader should proceed with first the preface and then the "Appendix: King-Fullerton Framework" to chapter 1 by Jorgenson, followed by that chapter.

Capital income taxation involves a complicated web of issues. The conceptual framework of the annualized rental cost of capital and the marginal effective tax rate on capital income "facilitates the representation of the economically relevant features of highly complex tax statutes in a very succinct form" [p. 4]. Cost of capital is affected by asset price inflation, measurement of economic depreciation (reflecting the decline in asset efficiency over time), tax code provisions for capital-cost recovery, and the capital market interest rate. Computation of the potentially complex family of marginal effective tax rates must incorporate various types of capital income and wealth taxes at both the business and personal levels in order to measure the overall burden of taxation. The capital allocation process is also highly complicated. The market economy allocates capital among corporate, noncorporate and owner-occupied housing sectors; types of fixed capital (equipment, construction, inventories); types of investment financing (equity, debt, retained earnings); types...