U.S. Department of the Treasury

(Archived Content)

FROM THE OFFICE OF PUBLIC AFFAIRS

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The President’s tax cuts have reduced the marginal effective tax rate (METR) on new investment, which is measured as the share of an investment’s economic income needed to cover taxes over its lifetime.  Lower METRs encourage additional investment, capital accumulation, and, in the long-term, higher living standards. 

As shown in the table below, reductions in personal income tax rates, including the lower tax rates on dividends and capital gains, enacted in 2001 and 2003 have reduced the METR in the corporate sector by 18 percent, and in the overall economy by 16 percent.

The temporary bonus depreciation provision enacted in 2001 and expanded in 2003 to 50% provides a potent short-term investment stimulus.  This provision lowered the METR on new equipment investment from 24.8 percent to 13.0 percent in 2003, and could even reduce it further in 2004, the year the provision expires. 

Leveling the Playing Field 
Taxing income from alternative investments at a more uniform METR – “leveling the playing field” -- promotes the efficient allocation of resources within the economy by allowing market fundamentals, rather than taxes, to guide financing and investment decisions.

By lowering the tax rate on dividends and capital gains, the 2003 Tax Act increased tax uniformity by substantially reducing the METR on income from corporate equity financed investment, relative to other sources of capital income, such as debt and non-corporate income.

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