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Adjustment costs and the neutrality of income taxes

Author

Listed:
  • Matt Benge
  • George Fane

Abstract

A 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).

Suggested Citation

  • Matt Benge & George Fane, 2006. "Adjustment costs and the neutrality of income taxes," Departmental Working Papers 2006-04, The Australian National University, Arndt-Corden Department of Economics.
  • Handle: RePEc:pas:papers:2006-04
    as

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    File URL: https://crawford.anu.edu.au/acde/publications/publish/papers/wp2006/wp-econ-2006-04.pdf
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    References listed on IDEAS

    as
    1. 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 1143-1158, December.
    2. Richard Hartman, 1978. "Investment Neutrality of Business Income Taxes," The Quarterly Journal of Economics, Oxford University Press, vol. 92(2), pages 245-260.
    3. Andrew B. Abel, 1983. "Tax Neutrality in the Presence of Adjustment Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 705-712.
    4. 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.
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    More about this item

    Keywords

    Capital gains tax; depreciation; income tax; investment neutrality.;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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