THE IMPLICATIONS OF RISK AND IRREVERSIBILITY FOR THE MEASUREMENT OF MARGINAL EFFECTIVE TAX RATES ON CAPITAL

The implications of risk and irreversibility for the measurement of ma rginal effective tax rates (METR) on capital are examined. It is shown that when capital is irreversible, the METR is an increasing function of systematic and unsystematic, capital and income risk. The tax syst em may thus distort investments in risky capital to a much greater ext ent than is implied by previous research that ignored irreversibilitie s. METR calculations based upon the Canadian corporate tax system are provided.