Progressive Income Taxes, Tax-Favoured Investments and Investment Behaviour

Anthony H. Chisholm
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Anthony H. Chisholm: Australian National University. I wish to thank E. Sieper and P. Swan for helpful discussions and for comments on an earlier version of this paper without implicating them in any remaining errors.

Australian Journal of Management, 1976, vol. 1, issue 2, 1-14

Abstract: The current debate on the taxation of business income highlights the need for the tax to not distort investment decisions. A tax on business income that permits immediate expensing of all outlays (including investment outlays) is shown to be a tax on pure profits, whereas a true income tax that allows the write-off of economic depreciation (Samuelson tax) is shown to be a tax on both pure profits and the ‘normal’ interest earned on investments. Neither tax distorts investment decisions, though the latter distorts consumption/investment decisions. Under existing progressive income taxes, which roughly approximate the Samuelson type of tax but which provide tax-concessions to favoured investment activities, pre-tax rates of return on the favoured investment activities will tend toward equilibrium levels below those for non-favoured investments. The tax-favoured investment areas eventually will be dominated by high tax-bracket investors.

Keywords: ECONOMIC DEPRECIATION; IMMEDIATE EXPENSING; INVESTMENT; TAX-FAVOURED INVESTMENTS (search for similar items in EconPapers)
Date: 1976
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:1:y:1976:i:2:p:1-14

DOI: 10.1177/031289627600100201

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