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The Tax Paradox and Weak Tax Neutrality

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  • Ramón E. López
  • Pablo Gutiérrez Cubillos
  • Eugenio Figueroa

Abstract

We introduce the concept of weak tax neutrality that establishes that the relationship between the tax rate and the user cost of capital may be non‐monotonic. We show that most existing corporate tax systems allow for weak neutrality. That is, given the tax allowances permitted by these systems, it is possible that neutrality may arise for at least one positive corporate tax rate. Moreover, we show the practical relevance of weak neutrality in realistic situations where there are several asset types and heterogeneous levels of firms' debt ratios.

Suggested Citation

  • Ramón E. López & Pablo Gutiérrez Cubillos & Eugenio Figueroa, 2020. "The Tax Paradox and Weak Tax Neutrality," Southern Economic Journal, John Wiley & Sons, vol. 86(3), pages 1150-1169, January.
    • Handle: RePEc:wly:soecon:v:86:y:2020:i:3:p:1150-1169
    DOI: 10.1002/soej.12398
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