Office of Tax Analysis

Technical Paper 10

May 2022

U.S. Cost of Capital Model Methodology

Tracy Foertsch

OTA Technical Papers is an occasional series of reports on the research, models and datasets 

developed to inform and improve Treasury’s tax policy analysis. The papers are works in 

progress and subject to revision. Views and opinions expressed are those of the authors and do 

not necessarily represent official Treasury positions or policy. OTA Technical Papers are 

distributed in order to document OTA analytic methods and data and invite discussion and 

suggestions for revision and improvement. Comments are welcome and should be directed to the 

authors. OTA Papers may be quoted without additional permission.
U.S. Cost of Capital Model Methodology

Tracy Foertsch*

U.S. Department of the Treasury

May 2022

This paper provides a detailed description of Treasury’s U.S. cost of capital 

model. U.S. effective marginal tax rates (EMTRs) for 2021 through 2031 are 

calculated for current law. These EMTRs take account of the extension and 

subsequent phase out of bonus depreciation with a methodology used by Cohen, 

Hansen, and Hassett (2002) to estimate the user cost of capital under a temporary 

bonus depreciation. The EMTRs also take account of several changes in current

law over the 10-year period. Those changes include of the expiration (sunset) of 

most of the 2017 Tax Cut and Jobs Act’s individual provisions at the end of 

calendar year 2025 and the replacement of expensing for research and 

experimentation (R&E) intangibles with amortization in 2022. They also include

the switch in the limitation on interest deductions from earnings before interest, 

tax, depreciation, and amortization (EBITDA) definition of adjusted taxable 

income to an earnings before interest and tax (EBIT) definition in 2022.

* Tracy.Foertsch@treasury.gov
1

A U.S. cost of capital model is used to calculate U.S. effective marginal tax rates (EMTRs) on 

new domestic investment. The model is used to determine how uniformly and heavily the federal 

government taxes capital income under current law and how that taxation would be affected by 

changes in tax policy.

I. Current-law provisions modeled for budget period 2021 through 2030

The 2017 Tax Cuts and Jobs Act (TCJA) combines individual and business tax reform. EMTRs 

from the U.S. cost of capital model include many of the provisions comprising those reforms.

With respect to individual tax reform, the TCJA eliminates or modifies many deductions and 

exclusions, including the repeal of the home mortgage interest (HMI) deduction for interest on 

mortgage debt in excess of $750,000 and the state and local tax (SALT) deduction for state and 

local taxes (e.g., real estate taxes, state and local income taxes) exceeding $10,000. The TCJA 

also eliminates personal exemptions but nearly doubles the standard deduction for singles, 

married filing jointly, and heads of households. It revises the tax brackets, lowers statutory 

personal income tax rates for most brackets, and raises individual exemption amounts and phaseout thresholds for the individual alternative minimum tax (AMT). It allows for a 20-percent 

deduction of domestic, pass-through business income of individuals, subject to certain 

limitations. On balance, the TCJA lowers marginal tax rates on ordinary income but only through 

the end of calendar year 2025, when most of the provisions comprising the individual tax reform 

sunset and prior tax law is reinstated beginning in January 2026. The use of the chained 

consumer price index (CPI) for indexing tax parameters is one notable exception to the 

temporary nature of the changes to the individual income tax. The TCJA makes chained CPI 

indexing permanent.

With respect to the business tax reform, the TCJA permanently replaces the prior corporate 

income tax rate schedule with its top rate of 35 percent with a flat 21-percent corporate income 

tax rate. It also eliminates both the Domestic Production Activities Deduction and the corporate 

AMT. It seeks to encourage new investment with both a permanent increase in Section 179 

expensing and an extension and expansion of bonus depreciation for qualified property, the same 

property to which bonus depreciation has applied under prior law.1 One-hundred-percent 

expensing of qualified property applies for 2021 and 2022, after which it is phased out at a rate 

of 20 percentage points per year. The TCJA also replaces expensing of R&E intangibles with 

amortization over a 5-year period beginning in 2022 and limits interest deductions to 30 percent 

of adjusted taxable income for corporate and noncorporate debt. For 2021, adjusted taxable 

1 MACRS is the Modified Acceleration Cost Recovery System. For the purposes of bonus depreciation, qualified 

property(investment)includes property that is depreciable under MACRS and has a recovery period of 20 years or 

less, MACRS water utility property, and computer software depreciable over 3 years. Qualifying property under 

bonus depreciation is comparable to qualifying investment for purposes of Section 179. A bonus depreciation 

deduction is claimed on the basis of qualifying property after reduction for any Section 179 deductions. Under prior 

law Section 179, taxpayers could elect to expense qualifying property upto a maximum deduction of $500,000 (the 

limitation). The Section 179 deduction was phased out dollar-for-dollar if qualified investment exceeded $2 million 

(the phase out threshold). Under the TCJA, the maximum amount that a taxpayer may expense increasesto $1 

million and the phase-out threshold increases to $2.5 million. The Section 179 deduction is also limited by a 

taxpayer’s taxable income.
2

income is calculated as earnings before interest, tax, depreciation, and amortization (EBITDA); 

beginning in 2022, it is computed as earnings before interest and tax (EBIT).

1. Extension and expansion of bonus depreciation for qualified property. 

Under the TCJA, 100 percent of the basis of qualified property can be deducted in 2021 and 

2022, 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026. 

However, bonus depreciation is elective and the effective marginal tax rate calculations do not 

assume that the maximum amount that may be deducted is taken as a deduction. The percent of 

the basis that is deducted (the expensing percentage) can be approximated using data for 2002 

through 2014 published in Kitchen and Knittel (2016).

2 We use the nonpublic IRS corporate and 

individual tax files to extend the data in Kitchen and Knittel (2016) through 2016.

A bonus depreciation expensing percentage for a given year is calculated by multiplying the 

bonus depreciation rate (e.g., 100 percent in 2022, 80 percent in 2023) by a bonus take-up 

percentage.3 Table 4 in Kitchen and Knittel (2016) shows the data needed to calculate bonus 

take-up percentages for C-corporations. Similarly, Table 5 through Table 7 give the data needed 

to calculate bonus take-up percentages for pass-through businesses (S-corporations, partnerships, 

and individuals).4 The bonus take-up percentage is the percent of the basis of qualified property 

on which bonus depreciation is claimed.

5 It is the grossed up bonus amount claimed divided by 

the total ‘equipment and software’ basis in Table 4 through Table 7 in Kitchen and Knittel

(2016).6 The gross up factor is the bonus depreciation rate. The average bonus take-up rate 

between 2012 and 2016 is 67 percent for C-corporations and 44 percent for pass-through entities. 

Between 2014 and 2016, the average bonus take-up rate is 64 percent for C-corporations7 and 43 

percent for pass-through entities.8

2 See Table 4 through Table 7 on pp. 21-24 in Kitchen and Knittel (2016). Table 4 through Table 7 give bonus takeup percentages for 2002 through 2014. John Kitchen and Matthew Knittel, 2016, ‘Business Use of Section 179 

Expensing and Bonus Depreciation, 2002-2014’, Office of Tax Analysis Working Paper 110, October, available at 

https://home.treasury.gov/system/files/131/wp-110.pdf. 3 Hence, the bonus depreciation expensing percentage is 100 percent for 2021 and 2022 if the take-up rate for bonus 

depreciation among businesses is 100 percent. 4 Individuals include sole proprietors, farmers, and rental real estate.

5 The calculation of the bonus take-up percentagein this paper differs slightly from Kitchen and Knittel(2016). In 

Table 4 through Table 7, Kitchen and Knittel(2016) use the total basis eligible for bonus in the denominator of the 

bonus take-up percentage and not the total ‘equipment and software’ basis. The total basis eligible for bonus has 

been adjusted for Section 179 allowances. However, the expensing percentages used in the cost of capital model 

include both bonus depreciation and Section 179 expensing. To add an expensing percentage for bonus depreciation 

to an expensing percentage for Section 179, the two expensing percentages need a common denominator. That 

common denominator is the total ‘equipment and software’ basis. 6 The total ‘equipment and software’ basis is Kitchen and Knittel (2016) includes some National Income and 

Product Accounts (NIPA) structures. See Table 8 (p. 25) in Kitchen and Knittel (2016). 7 Bonus take-up percentages vary from year to year. Between 2012 and 2016, the bonus depreciation rate was 50 

percent in every year. However, the bonus take-up percentage for C-corporations was almost 76 percent in 2012 but 

between 63 percent and 66 percent between 2013 and 2016. An average rate of 64 percent is used in the cost of 

capital model.

8 The bonus take-up rate for pass-through businesses was 47 percent in 2013 and approximately 43 percent in 2014 

and 2016. An average rate of 43 percent is used in the cost of capital model.
3

The expensing percentages used in the cost of capital model take account of both bonus 

depreciation and Section 179 expensing. The expensing percentages assumed for Section 179 are 

not large because of low take-up rates, particularly for C-corporations.9 The average Section 179 

expensing percentage for C-corporations is 1.8 percent between 2012 and 2016 and 1.7 percent 

between 2014 and 2016. The average expensing percentage for pass-through businesses is 15.5

percent between 2012 and 2016 and 15.1 percent between 2014 and 2016. Experience suggests 

that businesses are less likely to use Section 179 when 100-percent bonus depreciation is 

available. For example, in 2011, the bonus depreciation rate was 100 percent, and the Section 

179 expensing percentage was 1.5 percent for C-corporations and 15.2 percent for pass-through 

businesses. As a result, the effective marginal tax rate calculations are consistent with assuming a 

Section 179 expensing percentage of 1.7 percent for C-corporations and 15.1 percent for passthrough businesses.

Summing the Section 179 expensing percentage with the bonus depreciation expensing 

percentage gives the total expensing percentage used in the cost of capital model. The total 

expensing percentage is 65.7 percent for C-corporations and 58.1 percent for pass-through 

businesses in 2021 and 2022, implying that 65.7 percent of the C-corporation depreciation basis 

and 58.1 percent of the pass-through depreciation basis are being deducted immediately. The 

total expensing percentage drops in later years as bonus depreciation phases out. The percentage 

falls to 52.9 percent for C-corporations and 49.5 percent for pass-through businesses in 2023, to 

40.1 percent for C-corporations and 40.9 percent for pass-through businesses in 2024, to 27.3

percent for C-corporations and 32.3 percent for pass-through businesses in 2025, and to 14.5

percent for C-corporations and 23.7 percent for pass-through businesses in 2026. For 2027, the 

total expensing percentage used in the cost of capital model includes only the Section 179 

expensing percentage.

2. Limitation on interest deductions. 

The TCJA limits deductions for interest expense to 30 percent of adjusted taxable income plus 

business interest. Broadly speaking, for 2021, the TCJA defines adjusted taxable income as 

taxable income computed without regard to deductions for interest, depreciation, amortization, 

and depletion (EBITDA). After 2021, the TCJA defines adjusted taxable income as taxable 

income computed without regard to deductions for interest (EBIT). Because it does not include

deductions for depreciation, amortization, and depletion, adjusted taxable income defined using 

EBIT implies a larger reduction in the interest deduction than does an EBITDA-based definition

of adjusted taxable income. In the cost of capital model, this means that there is an increase in

the share of interest paid that cannot be deducted (the disallowance share) in 2022 as compared 

to the share of interest that cannot be deducted in 2021.

9 In this paper, the Section 179 take-up percentage is calculated as the ratio of the total 179 deduction claimed and 

the total ‘equipment and software’ basis. In Kitchen and Knittel (2016), it is calculated as the ratio of the total 179 

deduction claimed and the total basis eligible for Section 179. For C-corporations, the total basis eligible for Section 

179 is a small fraction of the total ‘equipment and software’ basis. Hence, Table 4 of Kitchen and Knittel (2016) 

reports a ‘179 takeup percentage’ for C-corporations in 2010 of 34 percent if calculated relative to eligible basis. 

The take-up percentage for C-corporations in 2010 is 1.8 percent if calculated relative to the total ‘equipment and 

software’ basis.
4

There are exceptions to TCJA’s limitations on interest deductions. For example, the limitation on 

interest deductions does not apply to businesses with gross receipts that are less than or equal to 

$25 million. 10 The limitation on interest deductions does not apply to regulated public utilities.11

For small businesses and regulated public utilities, the allowed interest deduction is the total 

interest paid. In addition, farms and real property trade and business (real estate) can elect out of 

the limitation on interest deductions.12 However, farms that elect out of the limitation are 

required to use the Alternative Depreciation System (ADS) for property with a recovery period 

of 10 years or more and real property trade and business is required to use the ADS for real 

property. 13 The effective marginal tax rate calculations assume that farms and real property trade 

and business elect out of the limitation on interest deductions and use the ADS.14

Finally, business interest is interest income included in gross income that is properly allocable to 

a trade or business, i.e., business interest income does not include investment interest income.15

The Internal Revenue Service (IRS) treats all interest includible in gross income by a Ccorporation as business interest income for purposes of the limitation on interest deductions. 

However, for S-corporations, Regulated Investment Companies (RICs), and Real Estate 

Investment Trusts (REITs), the cost of capital model assumesthat interest income is only 

business related in the case of finance and insurance businesses. 16 For non-C-corporation 

nonfinancial businesses, this means that the cost of capital model assumesthat the allowed 

interest deduction is 30 percent of adjusted taxable income. For non-C-corporation finance and 

insurance businesses, it means that the allowed interest deduction is 30 percent of adjusted 

taxable income plus business interest. 17

10 Specifically, average annual gross receipts over 3 tax years should be less than or equal to $25 million for the 

small business exception to apply.

11 In the cost of capital model, the exception for regulated public utilities is assumed to apply to all of utilities(North 

American Industry Classification System (NAICS) code 22). The extension and expansion of bonus depreciation for 

qualified property does not apply to regulated public utility property.

12 A real property trade or business is any real property development, redevelopment, construction, reconstruction, 

acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business (26 U.S. Code 

Section 469(c)(7)(C)). In the cost of capital model, real property trade and business is identified as real estate 

(NAICS code 531).

13 Under TCJA, the ADS recovery period for nonresidential buildings is 40 years while the ADS recovery period for 

tenant-occupied residential buildings is 30 years. The straight-line method is used with ADS recovery periods. 14 The effective marginal tax rate calculations alsoassume that all farms elect to use the 150-percent declining 

balance methodunder the TCJA. 15 Investment income is the gross income of property held for investment plus net capital gains from the disposition 

of property held for investment. Property held for investment includes property that produces interest, dividends, 

annuities, or royalties that are not derivedin the ordinary course of trade or business and an interest held in an 

activity involving the conduct of trade or business which is not passive but with respect to which the taxpayer does 

not participate materially (26 U.S. Code Section 163(d)(5)(A)). 16 For purposes of the limitation on interest deductions, finance and insurance businesses are defined as follows: 

credit intermediation (NAICScode 522); securities, commodity contracts, and other financial investments (NAICS

code 523); insurance carriers (NAICScode 524); funds, trusts, and other financial vehicles (NAICScode 525); and 

bank holding companies (NAICScode 551111). 17 Disallowance shares are calculated for the 54 industries that make up the cost of capital model using the variable 

for interest income on IRS Forms 1120, 1120-F, 1120-L, 1120-PC, 1120-REIT, 1120-RIC, and 1120S from the 

nonpublic IRS corporate study tax file.
5

The calculated disallowance shares vary by industry and sector, with the finance and insurance 

industries having some of the lowest shares.18 For C-corporations for 2021, the average 

disallowance share for nonfinancial businesses (excluding utilities, farms, and real estate) is 16.6

percent compared to 1.3 percent for finance and insurance businesses. The average C-corporation 

disallowance share for all 54 industries is 9.2 percent. For C-corporations from 2022 to 2027, the 

average disallowance share for businesses classified as nonfinancial (excluding utilities, farms, 

and real estate) is 27.8 percent compared to 1.8 percent for finance and insurance businesses. The 

average C-corporation disallowance share for all 54 industries is 15.20 percent.19 Disallowance 

shares for all 54 industries are generally lower for S-corporations, RICs, and REITs. For 2021, 

the average non-C-corporation disallowance share for all 54 industries is 5.4 percent. From 2022 

to 2027, it is 8.6 percent. 20

II. Model description

The U.S. cost of capital model21 includes 76 depreciable assets (equipment, nonresidential 

structures, and tenant-occupied residential structures), land, inventories, and intangibles 

(research and development (R&D), artistic originals, and advertising) for 54 industries based on

North American Industry Classification System (NAICS) codes. 22 Stock values for all categories 

of assets except land, inventories, and advertising are taken from the detailed fixed asset tables 

published by the U.S. Bureau of Economic Analysis (BEA). 23 These stock values are used to 

weight the user cost of capital by asset type and industry. EMTRs are typically calculated for a 

corporate (C-corporation) business sector, a pass-through business sector (S-corporations, RICs, 

REITs, partnerships, and sole proprietorships), and an owner-occupied housing sector using a 

18 For purposes of the cost of capital model, sector is defined in the next section. 19 Industry categories correspond to the IRS industry classification, which generally follows NAICS. The 

classification of a corporation to an industry is based on its primary business activity. The determination for 

corporations filing a consolidated tax return is based on the primary business activity for the group as a whole, as 

determined by the Statistics of Income (SOI) division of the IRS.

20 Average disallowance shares for S-corporations, Regulated Investment Companies (RICs), and Real Estate 

Investment Trusts (REITs) are higher if farms and real property trade and business are not assumed to elect out of 

the limitation on interest deductions. For 2021, the average non-C-corporation disallowance share for all 54 

industries is 9.4 percent. For 2022 through 2027, it is 15.9 percent. 21 For a description of the cost of capital methodology, see Fullerton, Gillette, and Mackie (1987),Gravelle (1994), 

and Ozanne and Burnham (2006). Don Fullerton, Robert Gillette, and James Mackie, James, 1987, ‘Investment 

Incentives under the Tax Reform Act of 1986’, in Office of Tax Analysis (eds), Compendium of Tax Research 1987, 

Washington, DC: Department of the Treasury, Office of Tax Policy, pp. 131-171; Jane G. Gravelle, 1994, The 

Economic Effects of Taxing Capital Income, Cambridge, MA: The MIT Press; and Larry Ozanne andPaul Burnham, 

2006, ‘Computing Effective Tax Rates on Capital Income’, Congressional Budget Office Background Paper, 

December, available at https://www.cbo.gov/publication/18259. 22 The cost of capital model includes 15 different types of research and development (R&D) and 5 different types of 

artistic originals. The artistic originals include theatrical movies, long-lived television programs, books, music, and 

other (theatrical plays, greeting cards, and stock photos). See the U.S. Bureau of Economic Analysis (BEA) detailed, 

current-cost estimates of the net stocks of nonresidential fixed assets at

https://apps.bea.gov/national/FA2004/Details/Index.htmfor a listing of the 15 different types of R&D. 23 See the detailed, current-cost estimates of the net stocks of residential and nonresidential fixed assets at

https://apps.bea.gov/national/FA2004/Details/Index.htm. BEA detailed fixed asset data for 2016 are used in the cost 

of capital model. Bureau of Labor Statistics (BLS) data are used to obtain the stock of wealth in land in the 

manufacturing, agricultural, and nonfarm nonmanufacturing sectors. NIPA data are used to provide values for 

inventories. Tax data for advertising deductions are used to obtain a net stock of advertising.
6

weighted-average user cost of capital.24 For C-corporations, they are also calculated for new 

investment financed with debt and new investment financed with equity.

1. Corporate and pass-through businesses.

EMTRs on new investments are hypothetical tax rates showing the total fraction of capital costs, 

excluding economic depreciation, needed to pay taxes over the lifetime of a marginal investment. 

If applied to economic income, they summarize the impact of major tax provisions on the 

investment incentives of businesses and investors. All else being equal, a higher effective tax rate 

is consistent with a lower incentive to save and invest. The effective marginal tax rate including 

only firm-level taxes is

(1) EEEEEEEE′ = (ρρ − rr′)⁄ρρ,

where ρρ is the user cost of capital net of economic depreciation and rr′ is the real after-tax rate of 

return to the marginal investor. 25 The user cost of capital is the real before-tax rate of return that 

a marginal investment must earn to recover the cost of the investment, pay taxes, and pay an 

expected after-tax rate of return on marginal saving. For equipment, structures, and intangibles, 

the user cost of capital net of economic depreciation is

(2) ρρ = �(rr + δδ) ∙ �1 − kk − AA(1 − kk)���(1 − ττ) − δδ,

where rr is the firm’s real discount rate, δδ is the economic depreciation rate, kk is an investment 

tax credit rate, and AA is the present value of the tax benefit from depreciation allowances.26 In 

equation (2),

(2a) AA = ∑ (1 + rr) −zzττzzDDzz YY

zz=1 ,

where YY is the recovery period, ττ is the federal business income tax rate, andDD denotes the 

depreciation allowance per dollar of investment.27 Omitting ττ from equation (2a) gives the 

present value of depreciation for tax purposes. Depreciation allowances per dollar of investment 

for the tax recovery periods and methods listed in Table 2 are taken from Appendix A (pp. 67-

94) of IRS (2019) Publication 946. 28 The depreciation rate tables included in Appendix A of IRS

(2019) Publication 946 incorporate applicable convention (e.g., the half-year convention for 

depreciable equipment, the mid-month convention for depreciable structures) and depreciation 

methods. Allowing for bonus depreciation,

24 Both RICs and REITs are treated as pass-through businesses in the cost of capital model. RICs are included in 

NAICS code 525. REITs are included in NAICS code 525 (funds, trusts, and other financial vehicles) and NAICS 

code 531 (real estate). 25 In equation (1), the real after-tax rate of return to the marginal investoris a weighted average of the required (pretax) real return on equity and a nominal market interest rate. It is identical to equations (3a) and (3b) if the share of 

business interest expenses that can be deducted is set to zero.

26 In Table 1, kk is the marginal effective investment tax credit rate on research and development. 27 The present value of the tax benefit from depreciation allowances is calculated on a discrete basis to take account 

of the expiration of the 20-percent deduction of pass-through business incomeat the end of calendar year 2025. 28 Internal Revenue Service, 2019, Publication 946 How to Depreciate Property, for Use in Preparing 2018 

Returns, available at http://www.irs.gov/pub/irs-pdf/p946.pdf.
7

(2b) AA = xxττ1 + (1 − xx) ∑ (1 + rr) −zzττzzDDzz YY

zz=1 ,

where xx is the expensing percentage discussed in the previous section.

In the cost of capital model, ρρ is calculated by sector, industry, and asset type.29 The user cost of 

capital for land and inventories excludes tax depreciation. The economic depreciation rate for 

land and inventories is set to zero. For inventories, the effective marginal tax rate is calculated 

using a cost of capital that is a weighted average of the cost of capital under last in, last out

(LIFO) accounting and the cost of capital under first in, first out (FIFO) accounting.30

For a corporate business, the firm’s real discount rate in equation (2) is the weighted average of a 

required (pre-tax) real return on equity (EEcc ) and a nominal market interest rate (ii). Thus,

(3a) rrcc = ffcc (ii(1 − γγcc ττcc) − ππ) + (1 − ffcc )EEcc,

where ffcc is the fraction of marginal corporate investment financed with debt and γγcc the share of 

corporate business interest expenses that can be deducted.31 For a pass-through business, the 

firm’s real discount rate is

(3b) rrpppp = ffpppp�ii�1 − γγppppττpppp� − ππ� + �1 − ffpppp�ssssss,

where the after-tax rate of return on corporate equity (ssssss) replaces EEcc in equation (3a). The 

after-tax rate of return on corporate equity is used so that pass-through business owners have no 

incentive to shift equity between their pass-through business and corporate equities to equalize 

marginal returns. The after-tax rate of return on corporate equity is a weighted average of the 

after-tax rate of return on corporate equity held in fully-taxable accounts (ssssss ss) (e.g., directlyheld corporate stocks), temporarily-deferred accounts (ssssssssss) (e.g., annuities, whole-life 

insurance policies), and nontaxable accounts (ssssssssss) (e.g., pension funds). Thus,

(4) ssssss = ααcccccc ∙ ssssss ss + ααcccc cc ∙ ssssssssss + ααcccccc ∙ ssssssssss.32

The after-tax rate of return on corporate equity in fully taxable accounts is a function of the share 

of after-tax profit retained by C-corporations, the federal tax rate on dividends, and the real 

29 The EMTRs by sector and broad asset type (e.g., equipment, structures, intangibles)in Table 4 and Table 5 are 

calculated using weighted-average values of ρρ. Stock values for the 76 depreciable assets, land, inventories, and 

intangible assets comprising the cost of capital modelare used as weights. 30 We calculate the share of inventories using FIFO accounting using inventory variables on IRS Form 1125 from 

the nonpublic IRS corporate study tax file. The share of inventories using FIFO accounting varies by industry. For 

33 industries, the share is 95 percent or higher. But for petroleum and coal products (NAICS code 324) it is 65.5 

percent; for retail trade (NAICS code 44), it is 73.2 percent. The average share of inventories using FIFOaccounting 

across all 54 cost-of-capital model industries is 85.4 percent. See pp. 23-24 of Ozanne and Burnham (2006) for the 

equations used to calculate the real before-tax rate of return to inventories under LIFO accounting and FIFO

accounting.

31 In equations (3a) and (3b), γγ is 1 minus the disallowance share. 32 For ααcccc cc and ααcccccc , see the shares of marginal saving (in corporate equity) that are deferred or exempted in Table 

1. To obtain ααcccccc , subtract ααcccc cc and ααcccccc from 1. The after-tax rate of return on corporate equity (ssssss) is less than 

EEcc, implying that the real discount rate for the corporate business is generally greater than the real discount rate for 

the pass-through business.
8

return on retained earnings after the capital gains tax is paid.33 The after-tax rate of return on 

temporarily-deferred accounts is a function of the federal tax rate on distributions from annuities 

and retirement saving. 34 The after-tax rate of return on nontaxable accounts equals EEcc.

The difference between ρρ and an overall after-tax rate of return to marginal saving (ss) gives the 

tax wedge. Dividing that tax wedge by ρρ gives

(5) EEEEEEEE = (ρρ − ss)⁄ρρ,

or an effective marginal tax rate that includes both firm-level taxes and individual-level taxes. 

For corporate businesses, ss in equation (5) is a weighted average of the after-tax rate of return on 

corporate equity and the after-tax rate of return on corporate debt. 35 As with the after-tax rate of 

return on corporate equity, the after-tax rate of return on corporate debt is a weighted average of 

the marginal saver’s returns to corporate debt holdings in fully taxable accounts (e.g., directlyheld corporate bonds, savings accounts), temporarily-deferred accounts, and nontaxable 

accounts. The after-tax rate of return on corporate debt in fully taxable accounts includes the 

federal marginal tax rate on interest income; the after-tax rate of return on corporate debt in 

temporarily-deferred accounts includes the federal marginal tax rate on distributions.

For pass-through businesses, ss is also a weighted average of the after-tax rate of return on 

corporate equity and the after-tax rate of return on corporate debt. However, the weights applied 

are specific to marginal saving in the pass-through businesssector. In general, for both corporate 

businesses and pass-through businesses, ss for equity falls below the real return on equity EEcc.

2. Owner-occupied housing.

The real before-tax return on owner-occupied housing is

(6) ρρ = rrh − ppγγhττh

if only federal-level tax provisions and state and local property taxes are considered.36 In

equation (6), rrh is the real discount rate for owner-occupied housing, pp the property tax rate, γγh

the share of subnational real estate taxes and home mortgage interest deducted by home owners, 

and ττh the federal tax rate applying to a marginal investment in owner-occupied housing.

Equation (6) reflects several differences in the tax treatment of owner-occupied housing. For 

example, income from an investment in owner-occupied housing is not taxed (ττ = 0), but no 

depreciation deductions are permitted for owner-occupied housing (AA = 0). Homeowners who 

itemize can deduct property taxes. The value of the real estate tax deduction is given by ppγγhττh. 

33 The real return on retained earnings after the capital gains tax is paid reflects several factors—the deferral of tax 

on real and inflationary gains until the asset is sold, different marginal tax rates on short-term capital gains and longterm capital gains, and the exemption from tax of capital gains held until death. See pp. 19-21 of Ozanne and 

Burnham (2006).

34 See Table 1 for federal individual-level tax rates used in calculating ssssss. 35 See the fraction of corporate marginal investment financed with debt in Table 1 for the weights used. 36 Equation (6) is given by ρρ = rrh + pp(1− γγh ττh) if the effective marginal tax rate calculations include both 

federal-level tax provisions and state and local property taxes.
9

Home owners who itemize can also deduct home mortgage interest expenses. Modifying

equations (3a) and (3b) gives

(7) rrh = ffh(ii(1 − γγhττh) − ππ) + (1 − ffh)EEh,

where ffh is the fraction of marginal investment in owner-occupied housing financed with debt

and ffhiiγγh h is the value of the home mortgage interest deduction.37 In the cost of capital model, 

γγh is calculated as the share of home mortgage interest that is deducted. Between 2021 and 2025, 

changes to the HMI and SALT deductions are assumed to reduce the value of γγh below what is 

calculated using 2016 data. After 2025, γγh is assumed to return to its value calculated using 2016 

data.38

3. Phase out of bonus depreciation.

Under the TCJA, 100-percent bonus depreciation is phased out at a rate of 20 percentage points

per year beginning in 2023. The phase out of bonus depreciation might be expected to pull 

investment forward, with the incentive effect being represented by lower EMTRs for new

investment in qualified property in 2022 when compared to EMTRs in 2023 and later. However, 

the intertemporal substitution of investment may be diminished by the costs of adjusting the level 

of the capitalstock. If adjustment costs are large, temporary bonus depreciation may have a 

smaller impact on current levels of investment. The cost of capital model takes account of

temporary tax incentives and other provisions of the TCJA that change incentive effects for 

nonresidential investment between 2021 and 2027.

Auerbach and Hassett (1992) show that with adjustment costs the optimal level of investment at 

time is a function of the weighted average of current and expected future user costs of capital, 

or 

(8) = ∑ss≥ wwss− ss,

where ss is the user cost of capital at ss and wwss− denotes weights that sum to one and vary with 

the marginal cost of adjustment. 39 With low adjustment costs, the weights applied to initial user 

costs are high, implying that investment is less affected by future user costs. With high

adjustment costs, the weights applied to the initial user costs are small, implying that investment 

37 EEh in equation (7) equals the after-tax rate of return on corporate equity. 38 Using 2016 data, γγh equals 0.8582. It is calculated as the ratio of mortgage interest deductions to mortgage 

interest payments. The value of mortgage interest deductions is taken from Table 2.1 of Statistics of Income(2016). 

Statistics of Income, 2016, Individual Income Tax Returns Publication 1304 2016, available at 

https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-returns-publication-1304-complete-report. The 

value of mortgage interest payments is taken fromline 16 (monetary interest paid by households for owner-occupied 

housing) of the July 30, 2019 release of U.S. BEA, NIPA Table 7.11(Interest Paid and Received by Sector and 

Legal Form of Organization), available at 

https://apps.bea.gov/histdata/fileStructDisplay.cfm?HMI=7&DY=2019&DQ=Q2&DV=Advance&dNRD=July-30-

2019. Between2021 and 2025, the value of γγh is assumed to be more than halved. 39 Alan Auerbach and Kevin Hassett, 1992, ‘Tax Policy and Business Fixed Investment in the United States’, 

Journal of Public Economics, Vol. 47 Issue 2, pp. 141-170, available at http://www.nber.org/papers/w3619

(National Bureau of Economic Research Working Paper No. 3619).
10

is more affected by future user costs. Auerbach and Hassett (1992) also use a ‘comprehensive’

measure of the user cost of capital given by

(9) ss = ((1 − ΓΓss) (1 − ττss ⁄ ))�rr + δδ + ((ΓΓss+1 − ΓΓss) (1 − ΓΓss ⁄ ))�,

where

(10) ΓΓss = kkss + AAss(1 − kkss).

Equations (9) and (10) make the user cost of capital in period ss a function of a one-period change 

in the present value of the tax benefit from depreciation allowances.

Cohen, Hansen, and Hassett (2002)40 use the framework established in Auerbach and Hassett

(1992) to estimate the user cost of capital under a temporary (3-year) bonus depreciation 

included in the Job Creation and Worker Assistance Act of 2002. 41 Using the bracketed part of 

equation (2), the user cost of capital would be the same in each of the three years over which 

bonus depreciation is in place. Using equations (9) and (10), Cohen, Hansen, and Hassett (2002)

obtain a user cost of capital that is lower in the final year of the temporary bonus depreciation 

(the transition year) than it is in the first two years because of the anticipated reduction in the 

present value of the tax benefit of depreciation allowances when bonus depreciation expires.42

Cohen, Hansen, and Hassett (2002) base the weights wwss− used in equation (8) on a term Ω from

Auerbach and Hassett (1992).43 For equipment, Auerbach and Hassett (1992) estimate an Ω of 

around 0.5. For structures, they indicate that a much higher Ω is appropriate, perhaps on the 

order of 0.95. Cohen, Hansen, and Hassett (2002) specify the relationship between Ω and wwss−

as follows:

(11a) ww0 = 1 − Ω,

(11b) wwss− = wwss− −1 ∙ Ω, ss > ,

where ∑ss≥ wwss− = 1. This means that with Ω = 0.5 in Cohen, Hansen, and Hassett (2002) the 

weights used in equation (8) are consistent with each successive year’s cost of capital being half 

as important as the previous one.

The EMTRs in Table 4 and Table 5 are obtained using weights comparable to those used in 

Cohen, Hansen, and Hassett (2002). For all modified accelerated cost recovery system (MACRS)

equipment and for nonresidential structures with recovery periods of 5 or 7 years, an Ω of 0.5 is 

40 Darrel Cohen, Dorthe-Pernille Hansen, and Kevin Hassett, 2002, ‘The Effects of Temporary Partial Expensing on 

Investment Incentives in the United States,’ National Tax Journal, Vol. LV No. 3, pp. 457-466, available at 

http://www.aei.org/wp-content/uploads/2011/10/20030121_rahass0209.pdf. 41 The Job Creation and Worker Assistance Act of 2002allowed 30 percent of the basis of qualifying property to be 

deducted in the first year if the qualifying property was acquired over a 3-year period beginning September 11, 2001 

and ending September 11, 2004.

42 Equation (9) is equivalent to equation (1a) in Cohen, Hansen, and Hassett (2002) if the bracketed part of equation 

(1a) is put in real terms and the same rate of inflation is assumed for both output prices and new capital goods prices. 43 Cohen, Hansen, and Hassett (2002) calculate weighted-average user costs of capitalfor assets with 3-year, 5-year, 

and 7-year lives under three alternative values for Ω (0.3, 0.5, and 0.7). An Ω = 0.3 corresponds to a low 

adjustment-cost case. An Ω = 0.7 corresponds to a high adjustment-cost case. An Ω = 0.5 is the mid-point case. 
11

used. 44 For all other structures, including electric and gas utility facilities which are depreciated 

using the 150-percent declining balance method with recovery periods of 15 or 20 years, an Ω of 

0.95 is used.45 For intangibles, an Ω of 0.5 is assumed. This is because 1⁄δδ for the 15 different 

types of R&D intangibles in the cost of capital model implies service lives between 2.8 years 

(computer systems design and related services R&D) and 10 years (pharmaceutical and medicine 

manufacturingR&D). The weighted-average service life for all 15 types of R&D intangibles is 

6.7 years. 46

The EMTRs in Table 4 and Table 5 are obtained by first calculating period-by-period values for 

the user cost of capital using equations (9) and (10) and then substituting values for ss into 

equation (8). EMTRs using the weighted-average user cost of capital net of economic 

depreciation are obtained using equation (5). These EMTRs show the impact on incentive effects 

of not only the phase out of bonus depreciation but also the expiration of the 20-percent 

deduction of domestic, non-service pass-through business income in 2025, the replacement of 

expensing for R&E intangibles with amortization in 2022, and the switch in the limitation on 

interest deductions from an EBITDA definition of adjusted taxable income to an EBIT definition

in 2022. The expiration of the 20-percent deduction of pass-through business income generally

increases the present value of the tax benefit from depreciation allowances. The switch from 

EBITDA definition of adjusted taxable income to an EBIT definition increases the real discount 

rate on debt-financed investment, which slightly lowers the present value of depreciation for tax 

purposes and, hence, the present value of the tax benefit of depreciation allowances.

4. Model parameters.

Some cost of capital model parameters are constant across all industries, sectors, and asset types 

(see Table 1). Those parameters include federal tax rates such as the statutory federal corporate 

income tax rate. They also include the inflation rate, the nominal interest rate, and the real return 

on corporate equity.

47

44 In the cost of capital model, some NIPA structures (e.g., wind and solar property, facilities used in the exploration 

for and production of natural gas and petroleum) are assumed to be depreciated using the 200-percent declining 

balance method with recovery periods of 5 or 7 years.

45 An Ωof 0.95 is also assumed for investments in land by corporate and pass-through businesses. 46 No adjustment costs (Ω = 0) are assumed for owner-occupied housing, owner-occupied housing land, and 

inventories. The fixed-asset,weighted-average Ωfor all structures is 0.43. The fixed-asset, weighted average Ωfor 

total business (corporate, pass-through) investment is 0.73, for corporate business is 0.67, and for pass-through 

business is 0.82. The fixed-asset, weighted average Ωfor total (corporate business, pass-through business, owneroccupied housing) investment is 0.44.

47 The cost of capital model uses 10-year, budget-period averages for the nominal (prime lending) interest rate and 

the annualized percent change in the gross domestic product (GDP) deflator. The real return on corporate equity is a 

long-term (1926-2016) historical average (real) return to corporate stocks. It is calculated using annual returns to the 

S&P 500 downloaded from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.htmland 

historic CPI-U data (Historical Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, all 

items, index averages; percent change from previous December) downloaded from 

https://www.bls.gov/cpi/tables/supplemental-files/home.htm. It is calculated as a geometric average.
12

a. Sector and industry specific parameters.

Some parameters are constant across all asset types but may vary by sector or industry. For 

example, income earned by a marginal investment flows through to individuals as marginal 

saving and accrues in fully taxable accounts, temporarily tax deferred accounts, and nontaxable 

accounts (e.g., equation (4)). The share of this marginal saving that is temporarily tax deferred or 

tax exempted is calculated for investments in corporate equity and corporate debt, pass-through 

business debt, and homeowner debt using a methodology described in Ozanne and Burnham

(2006).48 The average holding period (in years) for inventories is calculated by industry as the 

ratio of inventories to final sales. Industry-specific data on private inventories are taken from

National Income and Products Accounts (NIPA) Table 5.8.5B (Private Inventories and Domestic 

Final Sales by Industry) and NIPA Underlying Detail Table 1BUC (End-of-Period CurrentDollar Manufacturing and Trade Inventories).49 Data on total final sales of goods and structures 

by domestic business are also obtained from NIPA Table 5.8.5B. 50 The longest average holding 

periods are among the agricultural (NAICS code 11, 2.513 years) and manufacturing industries

(NAICS codes 31-33, 0.821 years). 51 The shortest is in finance and insurance (NAICS code 52, 

0.009 years).

The share of after-tax profit retained by C-corporations also varies by industry. Overall

(industry-wide) dividend-payout ratios are first calculated for 2006 through 2016 using data from

NIPA Table 6.19D (Corporate Profits After-Tax by Industry) and NIPA Table 6.20D (Net 

Corporate Dividend Payments by Industry) that have been scaled using detailed nonpublic 

corporate tax data to account for pass-through businesses filing an IRS Form 1120 (Scorporations, RICs, andREITs). 52 To obtain industry-specific dividend-payout ratios, nonpublic 

corporate tax data on after-tax profits and distributions are used to reallocate across industries the 

scaled NIPA totals for after-tax profits and net corporate dividends.

Dividing the resulting industry-specific distributions by industry-specific after-tax profits gives 

dividend-payout ratios for the cost of capital model’s 54 industriesfor 2006 through 2016. The 

48 See pp. 49-64 in Ozanne and Burnham (2006). Data for 2016from the June 6, 2019 release of the Board of 

Governors of the Federal Reserve System, Financial Accounts of the United States, 

https://www.federalreserve.gov/releases/z1/release-dates.htm, are used. 49 The September 26, 2019release of U.S. BEA, NIPA Table 5.8.5B(Private Inventories and Domestic Final Sales 

by Industry),

https://apps.bea.gov/histdata/fileStructDisplay.cfm?HMI=7&DY=2019&DQ=Q2&DV=Third&dNRD=September27-2019, and the September 26, 2019 release of U.S. BEA, NIPA Underlying Detail Table 1BUC (End-of-Period 

Current-Dollar Manufacturing and Trade Inventories),

https://apps.bea.gov/histdata/fileStructDisplay.cfm?HMI=7&DY=2019&DQ=Q2&DV=Third&dNRD=September27-2019, are used. Tax data on inventories by NAICS sector from the nonpublic IRS corporate tax file are used to 

disaggregate the NIPA data where industry detail is insufficient. 50 The April 19, 2019 release of BEAGDP-by-industry(value added by industry), 

https://www.bea.gov/industry/gdpbyind-data data are used to disaggregate total final sales data where industry detail 

is insufficient.

51 The average holding periods are GDP-by-industry weighted averages. 52 The July 30, 2019 releases of U.S. BEA, NIPATable 6.19D (Corporate Profits After-Tax by Industry) and NIPA 

Table 6.20D (Net Corporate Dividend Payments by Industry), 

https://apps.bea.gov/histdata/fileStructDisplay.cfm?HMI=7&DY=2019&DQ=Q2&DV=Advance&dNRD=July-30-

2019, are used.
13

dividend-payout ratios used for the cost of capital model are averages over 2006 to 2016.

53 One 

minus the dividend-payout ratio gives the share of after-tax profit retained by C-corporations. 

The overall average share of after-tax profit retained by C-corporations is 66.3 percent. The share 

of after-tax profit retained by C-corporations in several manufacturing sectors (e.g., NAICS code

325, 43.5 percent) falls below this overall average. The share of after-tax profits retained by Ccorporations in some of the service sectors (e.g., NAICS code 514, 93.2 percent; NAICS code

42, 79.5 percent) is above the overall average.

Finally, the share of investment financed with debt varies by sector and industry. The share of 

investment by C-corporations and noncorporate businesses financed with debt is calculated as a 

ratio of total debt to the sum of total debt and equity. Industry-specific values for total debt and 

equity are calculated in two steps.

First, a Compustat file is used to obtain data on total debt and stockholders’ equity in firms in the 

cost of capital model’s 54 industries. The Compustat file is the result of a match between 

Compustat data and corporate tax data not available to the public. The Compustat variable for 

equity that is used includes capital surplus, common stock, nonredeemable preferred stock, 

redeemable preferred stock, retained earnings, and Treasury stock (which reduces stockholder 

equity). The Compustat data are assumed to include only C-corporations. Comparable data for 

the debt and equity of pass-through (noncorporate) businesses are approximated by multiplying 

the Compustat value for C-corporations by the ratio of a tax-data proxy for all corporations (Ccorporations, S-corporations, RICs, and REITs) and a tax-data proxy for C-corporations.54

Second, 2016 data from the Financial Accounts of the United States are used to obtain target 

values for the total debt and equity of financial and nonfinancial C-corporations, noncorporate 

farm businesses, and nonfarm financial and nonfinancial noncorporate businesses.55 The targets 

for financial C-corporations and financial noncorporate businesses (NAICS code 52) are further 

subdivided into NAICS code 522 (credit intermediation and related activities), NAICS code 523 

(securities, commodity contracts, and investments), and NAICS code 525 (funds, trusts, and 

other financial vehicles) using unpublished corporate tax data.56 Target values are assigned to an 

industry in the cost of capital model where appropriate; otherwise, they are distributed across 

53 An average is taken because for some NAICS sectorsin some years NIPA corporate after-tax profits are positive 

but smaller than net corporate dividend payments. Calculated C-corporation dividend-payout ratios exceed one, 

implying that C-corporations retain a negative share of after-tax profits. 54 The tax-data proxy for total debt is the interest-paid deduction. The tax data proxy for total equity is the sum of 

capital stock liabilities, additional paid-in capital, and retained earnings (appropriated and unappropriated) minus the 

cost of treasury stock. Data for these variables are obtained from the nonpublic corporate tax data. 55 The June 6, 2019 release of the Board of Governors of the Federal Reserve System, Financial Accounts of the 

United States, https://www.federalreserve.gov/releases/z1/release-dates.htm, is used. See pp. 46-47 of Ozanne and 

Burnham (2006) for a listing of the Financial Accounts data used. Nonpublic corporate tax data are used to impute 

the share of Financial Accounts corporate debt and equity attributable C-corporations and the share attributable to Scorporations, RICs, and REITs. As with the Compustat data, the tax-data proxy for total debt is the interest-paid 

deduction. The tax-data proxy for total equity is the sum of capital stock liabilities, additional paid-in capital, and 

retained earnings (appropriated and unappropriated) minus the cost of treasury stock. 56 Target values for financial noncorporate businesses are the share of Financial Accounts financial corporate debt 

and equity attributable to S-corporations, RICs, and REITs. Target values for NAICS code 522, NAICS code 523, 

and NAICS code 525 are obtained using unpublished tax data.
14

industries using data on C-corporation debt and equity and S-corporation, RIC, and REIT debt 

and equity from the first step. The shares of investment financed with debt are then calculated for 

each of the 54 industries in the cost-of-capital model.

In general, the share of investment financed with debt is higher for C-corporations. Among Ccorporations, the capital-weighted average share of investment financed with debt is 32.3

percent. The share of investment financed with debt is lower for the nonfinancial sectors (26.5

percent) and substantially higher for the financial sectors (NAICS codes 522, 523, and 525, 96.8

percent).57

b. Cost recovery parameters. 

The cost recovery parameters, including economic depreciation rates and tax depreciation 

methods, vary by asset type and industry (see Table 2).58 Assets are depreciated using MACRS. 

Under MACRS, a combination of the tax recovery period and tax recovery method determines 

the depreciation schedule for an asset. The cost of capital model assigns one of nine different tax 

lives to each depreciable asset—3, 5, 7, 10, 15, or 20 years for equipment and some 

nonresidential structures; 25 years for water utility property; 27.5 years for residential rental 

property; and 39 years for nonresidential real property. 59 It also assigns one of three different tax 

recovery methods to each depreciable asset—straight line (SL), 150-percent declining balance 

with a switch to straight line (DBSL (150)), and 200-percent declining balance with a switch to 

straight line (DBSL (200)).

Table 2 shows that several types of nonresidential equipment are assumed to be depreciated over 

7 years using the DBSL (200) method while several types of nonresidential structures are 

assumed to be depreciated over 39 years using the SL method. Economic depreciation rates by 

asset type are taken from Hulten and Wykoff (1981)60 and U.S. Bureau of Economic Analysis 

(2003).61 IRS (2019) largely guides the assignment of recovery periods and tax recovery method 

by asset type. In general, for most types of equipment and nonresidential structures, the present 

57 The share of investment financed with debt in lower (between 70 percent and 80 percent) for the financial 

businesses if RICs and REITs are included with C-corporations. For example, Ozanne and Burnham (2006) include 

RICs and REITs with C-corporations. Only S-corporations are treated as pass-through businesses. They report that 

financial C-corporations finance about 73 percent of investment with debt. 58 In a few cases, the tax life and tax recovery method assigned to anasset can vary by industry. For example, under 

the TCJA, 7-year farm property can be depreciated over 5 years rather than 7 years. In addition, farm businesses are 

assumed to depreciate 5-year propertyusing the 150-percent declining balance methodwith a switch to the straightline method. Table 2 gives the tax lives and tax recovery methods that the cost of capitalmodel assigns to 

depreciable assets owned by nonfarm businesses.

59 In the cost of capital model, water utility property includes the nonresidential structures water supply and sewage 

waste and disposal in Table 2. Fifteen-year property includes otherwise depreciable land improvements that are not 

specifically included in IRS asset classes. Examples include roads, sidewalks, and bridges. Any real property trade 

or business that elects out of the limitation on interest deductions is required to use ADS for real property with a 

recovery period is 40 years for nonresidential buildings and 30 years for tenant-occupied residential buildings. 60 Charles R. Hulten and Frank C. Wykoff, ,1981, ‘The Measurement of Economic Depreciation’, in Charles R. 

Hulten (ed), Depreciation, Inflation, and the Taxation of Capital Income’, Washington, DC: The Urban Institute, pp. 

81-125. 61 U.S. Bureau of Economic Analysis, 2003, ‘Fixed Assets and Consumer Durable Goods in the United States, 1925-

1997’, September, available at https://www.bea.gov/node/24441. For an update of BEA’s depreciation estimates, 

‘BEA Depreciation Estimates’ at https://apps.bea.gov/national/pdf/BEA_depreciation_rates.pdf.
15

value of depreciation for tax purposes exceeds the present value of economic depreciation 

because allowances under MACRS are deducted sooner than are economic depreciation 

allowances (see Table 3). However, for some types of equipment and nonresidentialstructures,

the present value of economic depreciation exceeds the present value of depreciation for tax 

purposes, implying that allowances under MACRS are less generous.

Differences in the present value of depreciation for tax purposes contribute to variation in 

effective marginal tax rates across asset types and can potentially contribute to an inefficient 

allocation of capital. If depreciation for tax purposes matches economic depreciation, the 

effective marginal tax rates on depreciable assets do not vary by asset type, and the effective 

marginal tax rate on new equity-financed investment including only firm-level taxes (equation 

(1)) equals the statutory federal business income tax rate.

5. Limitations of the cost of capital model.

The U.S. cost of capital model omits some features of the federal tax code that may influence

domestic incentives to save and invest. For example, the effectivemarginal tax rate calculations 

exclude federal estate and gift taxes. They generally ignore special credits, deductions, rates, and 

other tax provisions intended to encourage investment in specific assets or industries. They

generally assume that firms use all available deductions and credits when such deductions and 

credits are likely to be of little use to a firm in a loss position or with a stock of unused tax losses 

and credit carry-forwards. However, they can include taxation of capital income at both the 

federal level and at the state and local levels, taking into account the effects of state and local 

income taxes, sales taxes, and property taxes on investment incentives.62

The cost of capital model also assumes that all savers and investors are subject to federal taxes. 

However, foreign savers do not pay federal individual-level taxes. This means that preferential 

capital gains tax rates and dividend income tax rates, lower federal corporate income tax rates, 

and other tax measures intended to reduce U.S. EMTRs on new investment may have less 

influence in an economy that is open to international capital flows.

Finally, the cost of capital model summarizes tax incentives for marginal (break-even) 

investments. The resulting EMTRs are considered to reflect the impact of taxes on the scale of 

investment in the United States. However, the TCJA makes substantial changes in the taxation of 

U.S. and foreign controlled multinational corporations. Some of these changes shift the United 

States from a world-wide tax system toward a participation exemption system. Other changes are 

intended to limit the erosion of the U.S. corporate income tax base by imposing a new minimum 

tax. Analysis with the cost of capital model does not include these international provisions that 

could impact the discrete choice about whether to locate an investment in the United States.

62 State and local income taxes and sales taxes are not included in this analysis.
16

Table 1. Key U.S. cost of capital model parameters

Current Law No Sunset

Market Rates of Return (in percent)

 Inflation Ratea 2.01 2.01

 Nominal Interest Ratea 5.32 5.32

 Real Return on Equityb 6.33 6.33

Federal Tax Rates (in percent) 2021-25 2026-30 2021-25 2026-30

 Statutory Federal Corporate Income Tax 

Rate

21.00 21.00 21.00 21.00

 Individual-Level Tax Rates on:c

 Dividend Income 18.13 19.35 18.13 18.51

 Long-term Capital Gains 20.03 20.86 20.03 20.32

 Short-term Capital Gains 30.80 33.33 30.80 31.56

 Interest Income 27.29 29.87 27.27 28.34

 Home Mortgage Interest and Real Estate 

Tax Deductionsd

(14.22) (20.30) (14.22) (13.22)

 Pass-through Business Income 25.61 30.88 25.57 26.24

 Distributions of Nonqualified Annuities 17.59 20.83 17.58 18.04

 Marginal Effective ITC Rate on Total R&D 6.89 6.89 6.89 6.89

Vary by Sector

Shares of Marginal Saving Deferred or 

Exemptede

Corporate Equity

 Temporarily Tax Deferred (ααcccc cc ) 0.045 0.045

 Nontaxable (ααcccccc ) 0.322 0.322

Corporate Debt

 Temporarily Tax Deferred (ααcccc cc ) 0.173 0.173

 Nontaxable (ααcccccc ) 0.291 0.291

Pass-through Business Debt

 Temporarily Tax Deferred (αα ) 0.113 0.113

 Nontaxable (αα ) 0.148 0.148

Homeowner Debt

 Temporarily Tax Deferred (ααh ) 0.029 0.029

 Nontaxable (ααh ) 0.078 0.078

Vary by Industry (industry averages shown)

Share of Investment Financed with Debtf

 C-corporations 0.3226 0.3226

 Pass-through Business 0.2285 0.2285

 Owner-occupied Housing 0.4241 0.4241

Share of After-tax Profit Retained by Ccorporationsg0.6629 0.6629

Average Holding Period (in years) for 

Inventoriesh

0.3657 0.3657

Source: US Department of the Treasury, Office of Tax Analysis
17

Notes: TCJA = Tax Cuts and Jobs Act; ITC = investment tax credit; R&D = research and development.

a. Table 1 shows 10-year, budget-period(2021-2030) averages for both the inflation rate and the nominal interest 

rate.

b. The long-term (1926-2016) historical average (real) return to corporate stocks is calculated using annual returns 

to the S&P 500 downloaded from 

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.htmland historic CPI-U data 

(Historical Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, all items, index 

averages; percent change from previous December) downloaded from 

https://www.bls.gov/cpi/tables/supplemental-files/home.htm. It is calculated as a geometric average.

c. Table 1 shows average income-weighted federal marginal tax rates from a microsimulation modelof individual 

tax. The ‘current-law’ individual-level federal tax rates assume that the TCJA’s individual provisions sunset in 

2025. The ‘no-sunset’ individual-level federal tax rates assume that the TCJA’s individual provisions do not 

sunset in 2025.

d. A blend of income-weighted federal marginal income tax rates calculated for the home mortgage interest 

deduction and the real estate taxes paid deduction.

e. Calculated using data for 2016 from the June 6, 2019release of the Board of Governors of the Federal Reserve 

System, Financial Accounts of the United States, https://www.federalreserve.gov/releases/z1/release-dates.htm. 

The shares of marginal saving exempted or deferred are calculated using the methodology described on pp. 49-

64 of Ozanne and Burnham(2006).

f. The share of investment financed with debt in C-corporations and pass-through businesses is calculated using 

nonpublic tax data and data from the June6, 2019release of the Financial Accounts of the United States. See

pp. 46-47 of Ozanne and Burnham(2006) for a listing of the Financial Accounts data used. The share of 

investment in owner-occupied housing financed with debtis the ratio of household sector home mortgage 

liabilities (Financial Accounts of the United States, June 6, 2019, release, Table L.218, line2) and value of 

household owner-occupied housing (Financial Accounts of the United States, June6, 2019, release, Table 

B.101, line 4).

g. The share of after-tax profits retained by C-corporations is obtained by subtracting a dividend-payout ratio from 

one. Dividend payout ratios are calculated using data from the July 30, 2019releases of U.S. BEA, National 

Income and Product Accounts (NIPA) Table 6.19D (Corporate Profits After-Tax by Industry) andNIPA Table 

6.20D (Net Corporate Dividend Payments by Industry), 

https://apps.bea.gov/histdata/fileStructDisplay.cfm?HMI=7&DY=2019&DQ=Q2&DV=Advance&dNRD=July30-2019, and data from the nonpublic IRS corporate tax file.

h. Calculated using data from September 26, 2019 releases of U.S. BEA, NIPA Table 5.8.5B (Private Inventories 

and Domestic Final Sales by Industry), 

https://apps.bea.gov/histdata/fileStructDisplay.cfm?HMI=7&DY=2019&DQ=Q2&DV=Third&dNRD=Septem

ber-27-2019, and U.S. BEA, NIPA Underlying Detail Table 1BUC (End-of-Period Current-Dollar 

Manufacturing and Trade Inventories), 

https://apps.bea.gov/histdata/fileStructDisplay.cfm?HMI=7&DY=2019&DQ=Q2&DV=Third&dNRD=Septem

ber-27-2019.
18

Table 2. Cost recovery parameters

Tax Depreciation Method

Asset Economic 

Depreciation 

Rate (δδ)

Recovery 

Period (Years)

Tax Recovery 

Method

Nonresidential Equipment

Mainframes 0.4532 5 DBSL (200)

Personal Computers 0.4009 5 DBSL (200)

Printers 0.3656 5 DBSL (200)

Terminals 0.2341 5 DBSL (200)

Storage Devices 0.3896 5 DBSL (200)

Prepackaged Software 0.5500 3 SL

Custom Software 0.3300 1 EXP

Own-account Software 0.3300 1 EXP

Communications Equipment 0.1112 7 DBSL (200)

Nonelectro Medical Instruments 0.1350 7 DBSL (200)

Electro Medical Instruments 0.1834 7 DBSL (200)

Nonmedical Instruments 0.1350 7 DBSL (200)

Photocopy and Related Equipment 0.1800 5 DBSL (200)

Office and Accounting Equipment 0.3119 5 DBSL (200)

Nuclear Fuel 0.2672 5 DBSL (200)

Other Fabricated Metal Products 0.0917 7 DBSL (200)

Steam Engines 0.0516 15 DBSL (150)

Internal Combustion Engines 0.2063 7 DBSL (200)

Metal-working Machinery 0.1183 7 DBSL (200)

Special Industrial Machinery 0.0856 7 DBSL (200)

General Industrial Equipment 0.1052 7 DBSL (200)

Electric Transmission and Distribution 0.0500 15 DBSL (150)

Light Trucks 0.1925 5 DBSL (200)

Other Trucks, Buses, and Trailers 0.1911 5 DBSL (200)

Autos 0.3333 5 DBSL (200)

Aircraft 0.0782 5 DBSL (200)

Ships and Boats 0.0611 10 DBSL (200)

Railroad Equipment 0.0589 7 DBSL (200)

Household Furniture 0.1375 5 DBSL (200)

Other Furniture 0.1179 7 DBSL (200)

Other Agricultural Machinery 0.1179 7 DBSL (200)

Farm Tractors 0.1452 7 DBSL (200)

Other Construction Machinery 0.1550 7 DBSL (200)

Construction Tractors 0.1633 7 DBSL (200)

Mining and Oilfield Machinery 0.1500 7 DBSL (200)

Service Industry Machinery 0.1502 7 DBSL (200)

Household Appliances 0.1650 5 DBSL (200)

Other Electrical Equipment 0.1834 7 DBSL (200)

Other Nonresidential Equipment 0.1473 7 DBSL (200)

Residential Equipment 0.1500 5 DBSL (200)
19

Table 2. Cost recovery parameters, cont’d.

Tax Depreciation Method

Asset Economic 

Depreciation 

Rate (δδ)

Recovery 

Period (Years)

Tax Recovery 

Method

Nonresidential Structures

Offices 0.0247 39 SL

Hospitals 0.0188 39 SL

Special Care 0.0188 39 SL

Medical Buildings 0.0247 39 SL

Multimerchandise Shopping 0.0262 39 SL

Food and Beverage Establishments 0.0262 39 SL

Warehouses 0.0222 39 SL

Mobile Structures 0.0556 39 SL

Other Commercial 0.0262 39 SL

Manufacturing 0.0314 39 SL

Electric Power Structures 0.0211 20/15a DBSL (150)

Gas Structures 0.0237 15 DBSL (150)

Petroleum Pipelines 0.0237 15 DBSL (150)

Wind and Solar 0.0303 5 DBSL (200)

Communication 0.0237 15 DBSL (150)

Petroleum and Natural Gas 0.0751 5 DBSL (200)

Mining 0.0450 7 DBSL (200)

Educational and Vocational 0.0188 39 SL

Lodging 0.0281 39 SL

Amusement and Recreation 0.0300 7 DBSL (200)

Air Transportation 0.0237 39 SL

Other Transportation 0.0237 39 SL

Other Railroad 0.0176 20 DBSL (150)

Track Replacement 0.0249 7 DBSL (200)

Local Transit Structures 0.0237 39 SL

Other Land Transportation 0.0237 5 DBSL (200)

Farm 0.0239 20 DBSL (150)

Water Supply 0.0225 25 SL

Sewage and Waste Disposal 0.0225 25 SL

Public Safety 0.0237 15 SL

Highway and Conservation 0.0225 15 DBSL (150)

Residential Structures

Owner-occupied Buildings 0.0151 NA NA

Tenant-occupied Buildings 0.0168 27.5 SL

Intangibles

Research and Development 0.1732 5 SLb

Artistic Originals 0.1360 15 SL

Advertisingc 0.6000 1 EXP

Source: US Department of the Treasury, Office of Tax Analysis
20

Notes: TCJA = Tax Cuts and Jobs Act; DBSL (200)= 200-percent declining balance with a switch to straight line; 

DBSL (150)= 150-percent declining balancewith a switch to straight line; SL = straight line; EXP = expensing; NA 

= not applicable. 

The cost recovery parameters shown apply from2027. However, under the TCJA,farms and real property trade and 

business can elect out of the limitation on interest deductions. If they do, farms are required to use the Alternative 

Depreciation System (ADS) for property with a recovery period of 10 years or more and real property trade and 

business is required to use ADS for real property. The ADS recovery period for nonresidential buildings is 40 years

while the ADS recovery period for tenant-occupied residential buildings is 30 years. The straight-line method is 

used with ADS recovery periods.

a. In Table B-2 of IRS(2019), electric utility nuclear production plants have a tax life of 15 years while other 

electric utility production plants have a tax life of 20 years. In the cost of capital model, the present value (PV) 

of depreciation for tax purposes for electric power structures is a weighted average of the PV of depreciation for 

tax purposes assuming a 15-year tax life and the PV of depreciation for tax purposes assuming a 20-year tax 

life. Weights are calculated using data on net generation by energy source in Table 3.1.A of U.S. Energy 

Information Agency (2019). U.S. Energy Information Agency, 2019,Electric Power Annual 2018, October, 

available at https://www.eia.gov/electricity/annual/.

b. For 2021, all research and development intangibles are assumed to be fully expensed with one exception. The 

cost of capital model assumes that domestic C-corporation exploration and drilling expenses are deducted with 

a 30 percent reduction in the allowable deduction. The 30-percent reduction is amortized over 5 years. 

Beginning in 2022, all research and development intangibles are amortizedover a 5-year period. The present 

value of tax depreciation in Table 3 reflectsthe treatment of research and development intangiblesfrom2022.

c. The economic depreciation rate for advertising is taken from p. 23 of Corado, Hulten, and Sichel(2004). Carol 

Corado, Charles Hulten, and Daniel Sichel, 2004, ‘Measuring Capital and Technology: An Expanded 

Framework’, 2004-65 Finance and Economic Discussion Series, Division of Research and Statistics and 

Monetary Affairs, Federal Reserve Board, available at 

http://www.federalreserve.gov/pubs/feds/2004/200465/200465pap.pdf
21

Table 3. Present value (PV) of economic and tax depreciation (corporate)

Asset PV Economic 

Depreciation 

(per Dollar)

PV Tax 

Depreciation 

(per Dollar)

100∗PV Tax 

Depreciation/PV 

Economic 

Depreciation 

Nonresidential Equipment

Mainframes 0.8991 0.8408 93.5

Personal Computers 0.8874 0.8289 93.4

Printers 0.8779 0.8283 94.4

Terminals 0.8216 0.8295 101.0

Storage Devices 0.8846 0.8337 94.2

Prepackaged Software 0.9154 0.8507 92.9

Custom Software 0.8665 1.0000 115.4

Own-account Software 0.8665 1.0000 115.4

Communications Equipment 0.6861 0.7930 115.6

Nonelectro Medical Instruments 0.7264 0.8129 111.9

Electro Medical Instruments 0.7829 0.8118 103.7

Nonmedical Instruments 0.7264 0.7915 109.0

Photocopy and Related Equipment 0.7797 0.8294 106.4

Office and Accounting Equipment 0.8598 0.8433 98.1

Nuclear Fuel 0.8401 0.8352 99.4

Other Fabricated Metal Products 0.6433 0.7893 122.7

Steam Engines 0.5037 0.6268 124.4

Internal Combustion Engines 0.8023 0.7923 98.8

Metal-working Machinery 0.6994 0.7899 112.9

Special Industrial Machinery 0.6274 0.8055 128.4

General Industrial Equipment 0.6742 0.7851 116.4

Electric Transmission and Distribution 0.4958 0.5661 114.2

Light Trucks 0.7910 0.8582 108.5

Other Trucks, Buses, and Trailers 0.7899 0.8337 105.5

Autos 0.8676 0.8665 99.9

Aircraft 0.6059 0.8121 134.0

Ships and Boats 0.5458 0.7358 134.8

Railroad Equipment 0.5367 0.8195 152.7

Household Furniture 0.7300 0.8376 114.7

Other Furniture 0.6987 0.7955 113.9

Other Agricultural Machinery 0.6987 0.7928 113.5

Farm Tractors 0.7406 0.7898 106.6

Other Construction Machinery 0.7530 0.8065 107.1

Construction Tractors 0.7625 0.8099 106.2

Mining and Oilfield Machinery 0.7468 0.7845 105.0

Service Industry Machinery 0.7471 0.7915 105.9

Household Appliances 0.7644 0.8380 109.6

Other Electrical Equipment 0.7829 0.8058 102.9

Other Nonresidential Equipment 0.7434 0.8039 108.1

Residential Equipment 0.7468 0.8329 111.5
22

Asset PV Economic 

Depreciation 

(per Dollar)

PV Tax 

Depreciation 

(per Dollar)

100∗PV Tax 

Depreciation/PV 

Economic 

Depreciation

Nonresidential Structures

Offices 0.3269 0.3665 112.1

Hospitals 0.2699 0.3654 135.4

Special Care 0.2699 0.3692 136.8

Medical Buildings 0.3269 0.3808 116.5

Multimerchandise Shopping 0.3400 0.3424 100.7

Food and Beverage Establishments 0.3400 0.3390 99.7

Warehouses 0.3039 0.3265 107.4

Mobile Structures 0.5223 0.3357 64.3

Other Commercial 0.3400 0.3359 98.8

Manufacturing 0.3818 0.3271 85.7

Electric Power Structures 0.2933 0.5672 193.4

Gas Structures 0.3179 0.6180 194.4

Petroleum Pipelines 0.3179 0.6197 194.9

Wind and Solar 0.3734 0.8295 222.2

Communication 0.3179 0.6178 194.3

Petroleum and Natural Gas 0.5963 0.8243 138.2

Mining 0.4695 0.7817 166.5

Educational and Vocational 0.2699 0.3249 120.4

Lodging 0.3559 0.3594 101.0

Amusement and Recreation 0.3711 0.7969 214.8

Air Transportation 0.3179 0.3310 104.1

Other Transportation 0.3179 0.5625 176.9

Other Railroad 0.2571 0.5413 210.5

Track Replacement 0.3287 0.7885 239.9

Local Transit Structures 0.3179 0.3029 95.3

Other Land Transportation 0.3179 0.8270 260.1

Farm 0.3197 0.4485 140.3

Water Supply 0.3067 0.4592 149.7

Sewage and Waste Disposal 0.3067 0.4612 150.4

Public Safety 0.3179 0.6043 190.1

Highway and Conservation 0.3067 0.6144 200.3

Residential Structures

Tenant-occupied Buildings 0.2489 0.4353 174.9

Intangibles

Research and Developmentb 0.7516 0.8102 107.8

Artistic Originals 0.7150 0.6010 84.1

Advertisingc 0.9219 1.0000 108.5

Source: US Department of the Treasury, Office of Tax Analysis

See notes to Table 2. Table 3 generally shows the PV of economic depreciationandthe PV of depreciationfor tax 

purposesfrom2027.
23

III. Effective marginal tax rate calculations under current law and no sunset

Table 4 shows EMTRs assuming current law. Under current law, TCJA’s individual provisions 

sunset in 2025 and prior law is reinstated in January 2026. Table 5 shows EMTRs assuming that 

TCJA’s individual provisions do not sunset at the end of calendar year 2025.

Assuming that the TCJA’s individual provisions sunset, the effective marginal tax rate on new 

business investment is 25.2 percent from 2027.63 The effective marginal tax rate on new 

corporate business investment is slightly lower at 24.3 percent because the cut in the federal 

corporate income tax rate is permanent. The effective marginal tax rate on new pass-through 

business investment is slightly higher at 26.5 percent because the 20-percent deduction of

domestic, pass-through income of individuals expires at the end of 2025 but the limitation on 

interest deductions is permanent. Assuming that the TCJA’s individual provisions are made 

permanent, the effective marginal tax rate on new pass-through business investment is 22.9

percent from 2027.

The effective marginal tax rate on total investment (corporate business, pass-through business, 

and owner-occupied housing combined) is lower if the TCJA’s individual provisions are 

assumed to sunset. This is because the expiration of the TCJA’s limits on the HMI and SALT

deductions (and the expiration of its increase in the standard deduction) reduce the effective 

marginal tax rate on owner-occupied housing from 6.8 percent in 2025 to -3.1 percent in 2026. 

Assuming no sunset of TCJA’s individual provisions, the effective marginal tax rate on owneroccupied housing increases from 6.8 percent in 2025 to 7.8 percent in 2026. As a result, the

effective marginal tax rate on total investment is 16.8 percent in 2027 under current law but 18.3 

percent assuming no sunset.

Between 2021 and 2026, the EMTRs are with one exception generally lowest in transition years

because of anticipated reductionsin the present value of the tax benefit of depreciation 

allowances. Transition years where this is the case include the final year of expensing for R&E 

intangibles (2021) and the final year of 100-percent bonus depreciation (2022). The one 

exception in the effective marginal tax rate calculations occurs with the sunset of the 20-percent 

deduction of domestic, pass-through income of individuals. In Table 4, the EMTRs for new passthrough business investment in equipment and intangibles are highest in 2025. This is because

the sunset of the 20-percent deduction and, hence, the increase in the federal tax rate on passthrough business income imply an anticipated increase in the present value of the tax benefits of 

depreciation allowances and amortization (in the case of R&E intangibles) after 2025.

Differences in asset mix also explain differences between corporate and pass-through EMTRs by 

asset type. For example, in the cost of capital model, almost 53 percent of corporate investment

in structures is in structures to which bonus depreciation applies. Just 12 percent of pass-through 

investment in structures is in structures to which bonus depreciation applies. As a result, under 

current law, the effective marginal tax rate on new investment in structures by corporate 

businesses increases 6.8 percentage points between 2022 and 2027 (from 17.4 percent in 2022 to 

24.1 percent in 2027) while the effective marginal tax rate on new investment in structures by 

63 The EMTRs in Table 4 and Table 5 are consistent with no changes in tax law from 2027.
24

pass-through businesses increases 3.8 percentage points (from 21.1 percent in 2022 to 24.8

percent in 2027). The gap between corporate and pass-through EMTRs for new investment in 

structures is larger if the TCJA’s individual provisions are assumed not to sunset. In Table 5, the 

effective marginal tax rate on new investment in structures by corporate businesses increases 6.1

percentage points between 2022 and 2027 (from 17.4 percent in 2022 to 23.5 percent in 2027)

while the effective marginal tax rate on new investment in structures by pass-through businesses 

increases only 1.6 percentage point (from 19.9 percent in 2022 to 21.5 percent in 2027).

The TCJA also does not eliminate differences between corporate and pass-through EMTRs by 

asset type because the real discount rate for pass-through businesses is less than the real discount 

rate for corporate businesses. The real discount rate for pass-through businesses is smaller

because the after-tax rate of return on equity (ssssss) is less than the required (pre-tax) real return 

on equity (EEcc ) (see equation (3a) and equation (3b)). It is also smaller because a higher federal 

pass-through business income tax rate and a smaller pass-through disallowance share increase 

the value of the interest deduction for pass-through businesses. A lower real discount rate for 

pass-through businesses implies a higher present value of depreciation for tax purposes, a lower 

user cost of capital net of economic depreciation, and generally a lower effective marginal tax 

rate. The difference in real discount rates is one reason why EMTRs on new investment in 

equipment are consistently lower for pass-through businesses in Table 5.
25

Table 4. Detailed EMTRs on new investment assuming the TCJA’s individual provisions sunset under current law (in percent)

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Business 19.8 20.9 21.7 22.4 23.3 24.4 25.2 25.2 25.2 25.2

 Corporate Business 17.2 18.7 19.4 20.2 21.1 23.1 24.3 24.3 24.3 24.3

 Asset Type

 Equipmenta 11.1 7.5 9.6 11.9 14.5 18.8 23.3 23.3 23.3 23.3

 Structuresb 19.3 17.4 17.9 18.5 19.3 21.6 24.1 24.1 24.1 24.1

 Landc 27.4 27.4 27.4 27.4 27.4 28.3 28.3 28.3 28.3 28.3

 Inventoriesc,d 30.7 30.9 30.9 30.9 30.9 31.6 31.6 31.6 31.6 31.6

 Intangiblese -47.5 8.7 8.7 8.7 8.7 9.8 9.8 9.8 9.8 9.8

 Financing

 Debt-financed 3.4 6.7 7.7 8.9 10.3 15.2 17.1 17.1 17.1 17.1

 Equity-financed 19.2 20.4 21.1 21.8 22.6 24.2 25.3 25.3 25.3 25.3

 Pass-through Business 23.4 24.0 24.6 25.2 25.7 26.2 26.5 26.5 26.5 26.5

 Asset Type

 Equipmenta 12.1 12.6 18.5 24.2 28.1 14.3 20.0 20.0 20.0 20.0

 Structuresb 20.8 21.1 21.7 22.8 24.7 24.2 24.8 24.8 24.8 24.8

 Landc 27.8 27.9 28.1 28.2 28.4 29.5 29.5 29.5 29.5 29.5

 Inventoriesc,d 30.3 30.5 30.5 30.5 30.5 35.8 35.8 35.8 35.8 35.8

 Intangiblese -33.7 11.3 13.0 17.4 26.1 6.3 6.3 6.3 6.3 6.3

Owner-occupied 

Housing 6.8 6.8 6.8 6.8 6.8 -3.1 -3.1 -3.1 -3.1 -3.1

Total 14.1 15.1 15.5 15.9 16.1 15.6 16.8 16.8 16.8 16.8

Source: U.S.Department of the Treasury, Office of Tax Analysis

Notes: LIFO = last in first out; FIFO = first in first out; EMTRs = effective marginal tax rates; TCJA = Tax Cut and Jobs Act.

The effective marginal tax rates shown include firm-level taxes and individual-level taxes. They also include Section 179 expensing, the Research and 

Experimentation (R&E) credit, and bonus depreciation. The individual-level taxes used to calculate the EMTRs are budget-period (2021-30) averages obtained 

from OTA's Individual Tax Model. The inflation rate and the nominal interest rate used are alsobudget-period averages. They are taken from the 

Administration’s fiscal-year 2021 baseline forecast.
26

a. Equipment includes both nonresidential and residential equipment.

b. Structures include nonresidential, tenant-occupied, and owner-occupied structures.

c. The economic depreciation rate is set to zero and no tax depreciation is included when calculating EMTRs.

d. For inventories, the effective marginal tax rate is calculated using a cost of capital that is a weighted average of the cost of capital under LIFO accounting and 

the cost of capital under FIFO accounting.

e. Intangible assets include research and development (R&D), artistic originals, and advertising. Advertisingis assumed to be expensed. Artistic originals are 

assumed to be depreciated over 15 years using the straight-line method. R&D is assumed to be expensed in 2021 and amortized over 5 years beginning in 2022.

f. The EMTRs assume that most of TCJA's individual provisions sunset at the end of calendar year 2025 and thatprior tax law is reinstated in January 2026. 

Other changes in tax law over the 10-year budget period are as follows: (i) The TCJA replaces expensing of R&E intangibles with amortization over 5 years 

beginning in 2022. (ii) The TCJA limits interest deductions to 30 percent of adjusted taxable income for corporate and noncorporate debt. In 2021, adjusted 

taxable income is calculated as earnings before interest,tax, depreciation, and amortization (EBITDA). From 2022, it is calculated as earnings before interest and 

tax (EBIT). (iii). One-hundred percent expensing of qualified property applies in 2021. Beginning in 2022, it phases out at a rate of 20 percentage points per year.
27

Table 5. Detailed EMTRs on new investment assuming the TCJA’s individual provisions do not sunset (in percent)

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Business 19.0 20.0 20.5 21.1 21.7 22.6 23.4 23.4 23.4 23.4

 Corporate Business 17.2 18.7 19.4 20.2 21.1 22.4 23.7 23.7 23.7 23.7

 Asset Type

 Equipmenta 11.1 7.5 9.6 11.9 14.5 18.1 22.6 22.6 22.6 22.6

 Structuresb 19.3 17.4 17.9 18.5 19.3 21.0 23.5 23.5 23.5 23.5

 Landc 27.4 27.4 27.4 27.4 27.4 27.7 27.7 27.7 27.7 27.7

 Inventoriesc,d 30.7 30.9 30.9 30.9 30.9 31.1 31.1 31.1 31.1 31.1

 Intangiblese -47.5 8.7 8.7 8.7 8.7 9.1 9.1 9.1 9.1 9.1

 Financing

 Debt-financed 3.4 6.7 7.7 8.9 10.3 13.1 15.1 15.1 15.1 15.1

 Equity-financed 19.2 20.4 21.1 21.8 22.6 23.8 24.9 24.9 24.9 24.9

 Pass-through Business 21.2 21.5 21.7 22.0 22.2 22.7 22.9 22.9 22.9 22.9

 Asset Type

 Equipmenta 5.9 2.7 5.6 8.6 11.5 12.4 17.3 17.3 17.3 17.3

 Structuresb 20.0 19.9 20.1 20.3 20.7 21.0 21.5 21.5 21.5 21.5

 Landc 25.2 25.3 25.3 25.3 25.3 25.7 25.7 25.7 25.7 25.7

 Inventoriesc,d 30.3 30.5 30.5 30.5 30.5 31.3 31.3 31.3 31.3 31.3

 Intangiblese -51.9 3.4 3.6 4.3 5.9 2.8 2.8 2.8 2.8 2.8

Owner-occupied 

Housing 6.8 6.8 6.8 6.8 6.8 7.8 7.8 7.8 7.8 7.8

Total 13.9 14.8 15.2 15.6 16.1 17.2 18.3 18.3 18.3 18.3

Source: U.S.Department of the Treasury, Office of Tax Analysis

Notes: LIFO = last in first out; FIFO = first in first out; EMTRs = effective marginal tax rates; TCJA = Tax Cut and Jobs Act.

The EMTRsin Table 5 assume that most of TCJA's individual provisions do notsunset at the end of calendar year 2025. See notes to Table 4.