The Tax Reform Act of 1986 and the Cost of Capital

The broad outlines of the recently passed Tax Reform Act of 1986 suggest a shift in the tax burden toward business. Over the five-year period 1987-1991, corporate tax revenues are projected to increase by $120.3 billion with individual tax revenues declining by $121.9 billion. It is natural to conclude that business investment in plant and equipment will be discouraged by this shift. Yet the relationship between tax revenues and investment incentives is a complicated one, particularly when the change in business tax revenues is accompanied by a major change in the tax structure producing these revenues. This paper's primary aim is to discuss the channels through which this major change in the tax structure will affect the incentives for business investment. Among the related questions discussed are the law's impact on the efficiency of capital allocation; corporate debt-equity ratios; corporate mergers and takeovers; tax shelter activity and the nonpayment of taxes by individuals and corporations; the strength of foreign investment in the United States; and the market value of the equity shares of U.S. corporations

Ad valorem tax · Business · Corporate Tax · Direct tax · Economics · Indirect tax · Monetary economics · Public economics · Revenue · Tax avoidance · Tax credit · Tax reform · Value-added tax · Corporate Taxation and Avoidance · Fiscal Policy and Economic Growth · Finance

• Tax reform and the cost of capital

  D W Jorgenson, Dale W Jorgenson et al.•Tax reform and the cost of capital•1991

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• The Structure of the Tax System Versus the Level of Taxation

  Open Access•J Gregory Ballentine•The Journal of Economic…•1992

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