As shown in Table 1 , tax rates for business investment fell from the early 1950s to the mid-1960s, reflecting more accelerated depreciation, investment credits, and lower statutory tax rates. The tax rate rose in 2004 due to higher inflation rates, and rose again in 2005 due to the end of bonus depreciation. These provisions affect marginal tax rates only if they affect the return to the marginal saving decision. In the case of total corporate tax rates in column 3, the pre-tax return R is derived from equation (1) but is compared with the return after personal taxes to individuals (the same discount rate used for non-corporate business), a weighted average of the after-tax real return on debt , where t is the individual tax rate, and the after-tax return on corporate equity (which is net of taxes on capital gains and dividends).
Effective marginal tax rates on investment are forward-looking estimates that project over the lifetime of an investment what share of the return will effectively be paid in taxes. These rates can differ significantly from average tax rates measured by dividing tax liability by income, because they are affected by timing. Effective tax rates fell from the early 1950s through the mid-1960s, rose until the early 1980s, and then dropped. They have stayed about the same until relatively recently, when they fell to an all-time low with bonus depreciation, relief of double tax on dividends, and lower marginal tax rates. The end of bonus deprecation and higher inflation rates increased the tax rates in the past two years. This report will be updated as warranted.