Adjustment costs and the neutrality of income taxes
AbstractA 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).
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Bibliographic InfoPaper provided by The Australian National University, Arndt-Corden Department of Economics in its series Departmental Working Papers with number 2006-04.
Length: 16 pages
Date of creation: 2006
Date of revision:
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Capital gains tax; depreciation; income tax; investment neutrality.;
Find related papers by JEL classification:
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-05 (All new papers)
- NEP-PBE-2006-02-05 (Public Economics)
- NEP-PUB-2006-02-05 (Public Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, vol. 72, pages 604.
- Hartman, Richard, 1978. "Investment Neutrality of Business Income Taxes," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 245-60, May.
- Green, Jerry R & Sheshinski, Eytan, 1978.
"Optimal Capital-Gains Taxation under Limited Information,"
Journal of Political Economy,
University of Chicago Press, vol. 86(6), pages 1143-58, December.
- Green, Jerry & Sheshinski, Eytan, 1978. "Optimal Capital-Gains Taxation Under Limited Information," Scholarly Articles 3210340, Harvard University Department of Economics.
- Abel, Andrew B, 1983. "Tax Neutrality in the Presence of Adjustment Costs," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 705-12, November.
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