Distortions from partial tax reform revealed through effective tax rates

The federal tax code contains many features that distort signals for efficiently allocating investment. We evaluate how well five recent proposals would improve those signals by increasing uniformity of effective tax rates among asset types, between debt and equity financing, between corporate and noncorporate businesses, and between owner-occupied and tenant-occupied housing. We find that three proposals-permanent extension of provisions enacted in 2001 and 2003, permanent extension of partial expensing enacted in 2002, and enactment of the President's proposed lifetime savings accounts-would reduce some distortions but aggravate others. Two other proposals-partial integration and a capped credit for mortgage interest-would reduce some distortions without aggravating others.