Effects of the 1981 Depreciation Revisions on the Taxation of Income From Business Capital

The new depreciation system adopted as part of the Economic Recovery Tax Act of 1981 will produce effective tax rates on new fixed investment estimated at 16 to 21 percent, well below the 46 percent statutory corporate rate and about half the rates estimated under prior law. Effective tax rates on most equipment investments will be negative and the new system tends to increase the differentials in tax rates by asset and by industry. Based on unitary elasticity assumptions, the deadweight loss from the misallocation of capital is estimated at 3. 5 to 3. 8 billion at 1980 price and income levels, an amount somewhat larger than the 2. 7 to 3. 3 billion estimated for prior law.