To measure tax burdens correctly, one should employ marginal rather than average tax rates. A new measure of the marginal effective tax rate on bank lending suggests that the tax burden on this activity has fallen modestly over the past ten years. This decline reflects the influence of the Tax Reform Act of 1986 together with falling reserve requirements and interest rates, both of which combined to lower the tax implicit in reserve requirements. This latter tax nevertheless continues to handicap the ability of banks to compete against other lenders.

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