U.S. Department of the Treasury 

Office of Tax Analysis 

November, 2021

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

2022-2025 2022-2025

21.00 28.00

18.45 26.55

20.07 31.99

29.33 31.83

24.79 27.20

-14.36 -14.60

27.57 29.64

17.51 17.68

6.89 6.89

0.3657

2022-2031 2022-2031

0.3226

0.2285

0.4241

0.6629

0.113

0.148

0.029

0.078

0.045

0.322

0.173

0.291

29.78

-21.26

31.66

20.51

6.89

2026-31

28.00

26.66

32.58

33.50

Average Holding Period (in years) for Inventories 0.3657

Policy

2.00

3.62

6.33

 Owner-occupied Housing 0.4241

Share of After-tax Profit Retained by C- 0.6629

Vary by Industry (industry averages shown)

Share of Investment Financed with Debt

C-corporations 0.3226

 Pass-through Business 0.2285

Homeowner Debt

 Temporarily Tax Deferred 0.029

 Nontaxable 0.078

Pass-through Business Debt

 Temporarily Tax Deferred 0.113

 Nontaxable 0.148

Corporate Debt

 Temporarily Tax Deferred 0.173

 Nontaxable 0.291

Corporate Equity

 Temporarily Tax Deferred 0.045

 Nontaxable 0.322

 Distributions of Nonqualified Annuities 20.45

 Marginal Effective ITC Rate on Total R&D 6.89

Vary by Sector

Shares of Marginal Saving Deferred or Exempted

 Interest Income 28.37

Home Mortgage Interest and Real Estate Tax -20.62

 Pass-through Business Income 31.27

 Dividend Income 19.30

 Long-term Capital Gains 20.82

 Short-term Capital Gains 31.85

Federal Tax Rates (in percent) 2026-31

 Statutory Federal Corporate Income Tax Rate 21.00

 Individual-Level Tax Rates on:

 Nominal Interest Rate 3.62

 Real Return on Equity 6.33

Current Law

Market Rates of Return (in percent)

 Inflation Rate 2.00
U.S. Department of the Treasury 

Office of Tax Analysis 

November, 2021

Table 2. Current Lawf

 Effective Marginal Tax Rates on New Investment (in Percent)

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Business 21.1 21.8 22.5 23.3 24.6 25.4 25.4 25.4 25.4 25.4

 Corporate Business 18.9 19.6 20.3 21.2 23.2 24.5 24.5 24.5 24.5 24.5

 Asset Type

 Equipmenta 7.5 9.6 11.9 14.5 18.8 23.3 23.3 23.3 23.3 23.3

 Structuresb 17.3 17.8 18.4 19.3 21.6 24.2 24.2 24.2 24.2 24.2

 Landc 27.5 27.5 27.5 27.5 28.4 28.4 28.4 28.4 28.4 28.4

 Inventoriesc,d 31.0 31.0 31.0 31.0 31.7 31.7 31.7 31.7 31.7 31.7

 Intangiblese 8.4 8.4 8.4 8.4 9.6 9.6 9.6 9.6 9.6 9.6

6.4

 Financing

 Debt-financed 2.4 3.7 5.2 6.8 13.9 16.3 16.3 16.3 16.3 16.3

 Equity-financed 20.4 21.1 21.8 22.7 24.1 25.2 25.2 25.2 25.2 25.2

 Pass-through Business 24.2 24.7 25.2 25.6 26.4 26.7 26.7 26.7 26.7 26.7

 Asset Type

 Equipmenta 9.3 14.7 20.0 24.0 14.3 20.2 20.2 20.2 20.2 20.2

 Structuresb 21.4 21.9 22.8 24.3 24.3 24.9 24.9 24.9 24.9 24.9

 Landc 28.2 28.3 28.5 28.6 29.7 29.7 29.7 29.7 29.7 29.7

 Inventoriesc,d 32.3 32.3 32.3 32.3 36.4 36.4 36.4 36.4 36.4 36.4

 Intangiblese 9.7 11.0 14.5 21.7 6.2 6.2 6.2 6.2 6.2 6.2

3.0

Owner-occupied Housing 2.7 2.7 2.7 2.7 -4.7 -4.7 -4.7 -4.7 -4.7 -4.7

Total 14.2 14.6 15.0 15.2 15.4 16.7 16.7 16.7 16.7 16.7

Source: US 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 also 

budget-period averages. They are taken from the Administration’s fiscal-year 2021 baseline forecast. 

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. Advertising 

is assumed to be expensed. Artistic originals are assumed to be depreciated over 15 years using the straight-line method.

R&D 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 that 
U.S. Department of the Treasury 

Office of Tax Analysis 

November, 2021

Table 3. Policyf Effective Marginal Tax Rates on New Investment (in Percent)

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Business 25.9 26.7 27.4 28.3 29.6 30.5 30.5 30.5 30.5 30.5

 Corporate Business 26.2 27.1 28.0 29.1 31.0 32.6 32.6 32.6 32.6 32.6

 Asset Type

 Equipmenta 10.3 13.3 16.4 20.0 25.0 30.7 30.7 30.7 30.7 30.7

 Structuresb 23.6 24.3 25.1 26.1 28.5 31.7 31.7 31.7 31.7 31.7

 Landc 36.2 36.2 36.2 36.2 36.8 36.8 36.8 36.8 36.8 36.8

 Inventoriesc,d 40.5 40.5 40.5 40.5 40.9 40.9 40.9 40.9 40.9 40.9

 Intangiblese 19.5 19.5 19.5 19.5 20.2 20.2 20.2 20.2 20.2 20.2

7.5

 Financing

 Debt-financed -4.9 -2.9 -0.6 2.0 9.2 12.9 12.9 12.9 12.9 12.9

 Equity-financed 29.1 29.9 30.8 31.8 33.2 34.6 34.6 34.6 34.6 34.6

 Pass-through Business 25.1 25.5 25.9 26.2 26.9 27.2 27.2 27.2 27.2 27.2

 Asset Type

 Equipmenta 5.7 10.4 15.1 19.0 14.7 20.8 20.8 20.8 20.8 20.8

 Structuresb 22.7 23.0 23.6 24.5 24.7 25.4 25.4 25.4 25.4 25.4

 Landc 29.2 29.3 29.3 29.4 30.2 30.2 30.2 30.2 30.2 30.2

 Inventoriesc,d 34.9 34.9 34.9 34.9 37.2 37.2 37.2 37.2 37.2 37.2

 Intangiblese 8.4 9.2 11.4 16.1 6.5 6.5 6.5 6.5 6.5 6.5

2.3

Owner-occupied Housing 3.8 3.8 3.8 3.8 -4.5 -4.5 -4.5 -4.5 -4.5 -4.5

Total 18.0 18.4 18.7 19.0 19.3 20.9 20.9 20.9 20.9 20.9

Source: US 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 also 

budget-period averages. They are taken from the Administration’s fiscal-year 2021 baseline forecast. 

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. Advertising 

is assumed to be expensed. Artistic originals are assumed to be depreciated over 15 years using the straight-line method.

R&D assumed to be expensed in 2021 and amortized over 5 years beginning in 2022.

f. The EMTRs include Greenbook proposals that would raise the corporate income tax rate (from 21% to 28%) and marginal tax rates on dividend income and capital gains.
U.S. Department of the Treasury 

Office of Tax Analysis 

November, 2021

1

Notes on Effective Marginal Tax Rates (EMTRs) on new investment under Current Law (CL) and 

Policy (i.e., the 2021 Greenbook proposals): 

1. EMTRs on new investment are calculated under CL and policy (see Tables 2 and 3). The policy

proposals include an increase in the flat federal corporate income tax rate from 21% to 28%. They

also include an increase in the top marginal individual income tax rate to prior law levels (of 39.6%)

in 2022 through 2025 and higher marginal tax rates on dividend income and capital gains.

2. EMTRs under CL and policy from 2027 forward are the same because bonus depreciation has fully

phased out and TCJA’s individual provisions have sunset.

3. EMTRs between 2022 and 2026 vary by year because bonus depreciation phases out at a rate of 20

percentage points per year beginning in 2023 (i.e., bonus depreciation is 80% in 2023, 60% in 2024,

40% in 2025, 20% in 2026, and 0% in 2027) and TCJA’s individual provisions sunset at the end of

calendar year 2025. The effects of these year-to-year changes in tax law are captured in the cost of

capital model using a “comprehensive” measure for the user cost of capital ሺc௦ሻ given by

(1) c௦ ൌ ሺሺ1 െ Γ௦ሻ ሺ1 െ τ௦ ⁄ ሻሻ൫r ൅ δ ൅ ሺሺΓ௦ାଵ െ Γ௦ሻ ሺ1 െ Γ௦ ⁄ ሻሻ൯,

where Γ௦ ൌ k௦ ൅ A௦ሺ1 െ k௦ሻ, A௦ is the present value of the tax benefit from depreciation allowances, 

k௦ is an investment tax credit rate, r is the real discount rate, and δ is the economic depreciation rate. 

Equation (1) includes a component, ሺሺΓ௦ାଵ െ Γ௦ሻ ሺ1 െ Γ௦ ⁄ ሻሻ, that makes the user cost of capital in 

period s a function of an anticipated one-period change in the present value (PV) of the tax benefit 

from depreciation allowances. The PV of the tax benefit from depreciation allowances can vary as a 

result of either a change in the business income tax rate or a change in the PV of tax depreciation. 

4. For corporate businesses, EMTRs on new investment for all asset types are higher under policy.

However, it is worth noting that two types of effects work in opposite directions. The increase in the

corporate income tax rate from 21% to 28% would tend to increase the user cost of capital.

However, it would also increase the value of deductions for interest expenses, which would have the

effect of reducing the real discount rate on debt-financed investment. A lower real discount rate

would imply a higher PV of tax depreciation and a higher PV of the tax benefit of depreciation

allowances. The net result of these offsetting effects can vary depending on how the investment is

financed and the extent to which the investment benefits from depreciation.

a. Under policy, the PV of tax depreciation and the PV of the tax benefit from depreciation

allowances are higher for debt-financed corporate investment and for total corporate

investment (i.e., a weighted average of debt-financed investment and equity-financed

investment). This is true for equipment, structures, and intangibles.

b. The user cost of capital is lower for debt financed corporate investment for all asset types and

for total corporate investment in equipment. However, it is higher for total corporate

investment in structures and intangibles.

c. All 43 types of equipment in the cost of capital model benefit from bonus depreciation. Only

some of the 33 nonresidential structure types (e.g., electric structures, wind and solar
U.S. Department of the Treasury 

Office of Tax Analysis 

November, 2021

2

structures) benefit form bonus depreciation, and all but one intangible asset type (advertising) 

is amortized. 

d. As a result, only in the calculation of the user cost of capital for total corporate equipment 

investment is the effect of the higher PV of the tax benefit of depreciation allowances not

offset by the effect of the higher corporate tax rate. 

5. For pass-through business investment, EMTRs on new investment for equipment and intangibles are 

lower under policy than under CL between 2022 and 2025. However, EMTRs on new investment in 

all asset types are higher under policy from 2026. 

a. The business income tax rate for pass-through businesses is about 2.1 percentage points 

higher under policy between 2022 and 2025; it is just slightly higher under policy between 

2026 and 2031 (see Table 1). This means that as in the case of corporate investment the 

overall PV of tax depreciation and the overall PV of the tax benefit from depreciation 

allowances are higher for pass-through investment under policy between 2022 and 2025. 

b. A comparison of calculations for pass-through businesses and corporate businesses shows 

that, as compared to CL, the decline in the user cost of capital is generally greater for passthrough business investment than it is for corporate business investment. This is a function 

of the smaller percentage point increase in the pass-through business income tax rate. 

i. More specifically, for pass-through business investment, the user cost of capital is 

lower for equipment, structures, and intangibles under policy. The declines in the 

user cost of capital are greatest for equipment and intangibles, the two asset types for 

which the EMTRs on new investment are lower between 2022 and 2025 relative to 

CL. 

c. The EMTRs for pass-through business investment are also influenced by the expiration of the 

20% deduction for domestic, pass-through business income. The absolute value of the 

change in the user cost of capital attributable to ሺሺΓ௦ାଵ െ Γ௦ሻ ሺ1 െ Γ௦ ⁄ ሻሻ in equation (1) is 

greater under policy because of the higher PV of the tax benefit of depreciation allowances 

relative to CL. Between 2022 and 2024, ሺሺΓ௦ାଵ െ Γ௦ሻ ሺ1 െ Γ௦ ⁄ ሻሻ ൏ 0, generating a reduction 

in the user cost of capital. With the reduction in the user cost of capital greater under policy 

than under CL, this produces an incentive to pull investment forward into the phase-out 

period for bonus depreciation. 

d. In the case of both CL and policy, the EMTRs on pass-through business investment are lower 

in 2026 than in 2025. This can be explained as follows. First, the sunset of the 20% 

deduction increases the tax rate on pass-through business income. The higher tax rate on 

pass-through business income increases the anticipated PV of the tax benefit of depreciation 

allowances in 2026 ሺs ൅ 1ሻ relative to 2025 ሺsሻ. In terms of equation (1), 

ሺሺΓ௦ାଵ െ Γ௦ሻ ሺ1 െ Γ௦ ⁄ ሻሻ ൐ 0 in 2025. The result is an increase in the user cost of capital and 

the EMTR.