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Progressive Income Taxes, Tax-Favoured Investments and Investment Behaviour

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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.)

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.

Suggested Citation

  • Anthony H. Chisholm, 1976. "Progressive Income Taxes, Tax-Favoured Investments and Investment Behaviour," Australian Journal of Management, Australian School of Business, vol. 1(2), pages 1-14, October.
    • Handle: RePEc:sae:ausman:v:1:y:1976:i:2:p:1-14
    DOI: 10.1177/031289627600100201
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    References listed on IDEAS

    as
    1. Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, vol. 72, pages 604-604.
    2. J. vv. Bennett & G. C. Habcoxjbt, 1960. "TAXATION and BUSINESS SURPLUS," The Economic Record, The Economic Society of Australia, vol. 36(75), pages 425-428, August.
    3. Chisholm, Anthony H, 1975. "Income Taxes and Investment Decisions: The Long-Life Appreciating Asset Case," Economic Inquiry, Western Economic Association International, vol. 13(4), pages 565-578, December.
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