Investment, growth, and uniformity versus selectivity in capital income taxation: testing the King-Fullerton framework

This paper criticises the view that deviations from uniformity in capital taxation, as measured by dispersion of effective marginal tax rates in the King-Fullerton (1984) framework, are always undesirable. International evidence shows a consistent pattern of tax selectivity. We argue that in presence of investment externalities, particularly in the case of machinery, some degree of tax discrimination may be justified. Moreover, there is no evidence that standard deviations of effective tax wedges and investment or growth are inversely correlated. Troubles arise not with the method in itself, but with a less than careful use of its results for policy conclusions.