The Tax Reform Act of 1986 (TRA) attempts to "level the playing field" between equipment and other tangible assets by repealing the investment tax credit that was available only for equipment. This change may not increase economic efficiency, however, if there exist substantial amounts of intangible capital. Advertising along with research and development (R & D) are viewed as investments in goodwill and production expertise. As forms of intangible capital, they receive the significant tax advantage of immediate expensing rather than delayed depreciation deductions. This chapter finds that effective tax rates are mismeasured when this investment is ignored. The United States in 1983 had about $165 billion of advertising capital and $305 billion of R & D capital, which together make up 11 percent of the total capital stock. The inclusion of this intangible capital with a zero effective tax reduces by one-third the gain in efficiency from prior law obtained by repealing the investment tax credit for equipment. With more of this untaxed intangible capital, repeal of the investment tax credit can actually reduce overall efficiency. The TRA always increases this measure of production efficiency because it lowers the taxation of other tangible assets at the same time that it repeals the investment tax credit.