The Neutrality of Business Taxation in the Presence of Capital Adjustment Costs and Risk

Kenneth McKenzie

Working Paper from Economics Department, Queen's University

Abstract: The investment neutrality conditions of an imputed profits tax, which grants ex ante depreciation allowances, are examined in the presence of income and capital risk and capital adjustment costs. Neutrality may be achieved with a cost of finance deduction on the full market value of the firm, but at a risk-free interest rate plus depreciation allowances based on the ex ante rate of economic depreciation. The ex ante economic depreciation rate is a certainty equivalent, reflecting the systematic and unsystematic income and capital risk characteristics of the investment.

Keywords: taxes; risk; capital; business cycles; investments (search for similar items in EconPapers)
Pages: 49 pages
Date: 1989
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:759

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