Adjustment costs and the neutrality of income taxes

Matt Benge and George Fane (george.fane@anu.edu.au)

Departmental Working Papers from The Australian National University, Arndt-Corden Department of Economics

Abstract: A true income tax would not affect asset values or investment decisions for given values of cash flows and pre-tax interest rates (Samuelson, 1964). However, most so-called income taxes do not fully tax capital gains on accrual. This note shows that in the absence of adjustment costs, investment decisions are not distorted by the lack of a comprehensive tax on the capital gains on unimproved land, provided that the depreciation of improvements is allowed as a tax deduction. It also provides the intuition underlying the closely related results of Hartman (1978) and Abel (1983).

Keywords: Capital gains tax; depreciation; income tax; investment neutrality. (search for similar items in EconPapers)
JEL-codes: H25 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2006
New Economics Papers: this item is included in nep-pbe and nep-pub
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