Tax Reform and the Cost of Capital

The cost of capital was introduced almost thirty years ago and quickly became an indispensable tool for modelling the impact of tax policy on investment behavior. Within the past decade, the cost of capital has assumed a central role in tax reform debates through the closely related concept of the marginal effective tax rate. This book provides a comprehensive treatment of the cost of capital approach to tax policy analysis. Keeping the analytical level of this work has been kept to a minimum, the authors introduce complexities in a step by step fashion, leading up to a representation of tax systems for capital income that is suitable for tax policy analysis. The success of the cost of capital approach is due in large part to its ability to assimilate a virtually unlimited amount of descriptive detail on alternative tax policies. To provide guidance to students and tax policy professionals, this book contains a full implementation of the approach for the United States, including an analysis of the alternative proposals that culminated in the highly influential Tax Reform Act of 1986 in the United States. It also describes opportunities for further research and gives a complete and up-to-date bibliography to the rapidly expanding literature. This is the first in a series of Lectures in Monetary and Fiscal Policy at Uppsala University in honor of Erik Lindahl.