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A General Proposition on the Design of a Neutral Business Tax


  • Robin Boadway
  • Neil Bruce


A business tax is neutral if it does not effect the firms' decisions at the margin. We analyze the effect of a business tax on the firms' investment decision. The "implicit rent deduction" and "immediate write-off" methods are found to be special cases of our general tax design. The implication of our results is that a neutral "pure profits" tax can be levied without the informational difficulties of the implicit rent deduction method or the cash flow disadvantages of the immediate write-off method. The general tax design remains neutral in the presence of adjustment costs, but only the implicit rent deduction method is neutral in the face of anticipated tax rate changes.

Suggested Citation

  • Robin Boadway & Neil Bruce, 1982. "A General Proposition on the Design of a Neutral Business Tax," Working Papers 461, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:461

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    References listed on IDEAS

    1. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters,in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
    2. Bulkley, George, 1981. "Personal Savings and Anticipated Inflation," Economic Journal, Royal Economic Society, vol. 91(361), pages 124-135, March.
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    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L68 - Industrial Organization - - Industry Studies: Manufacturing - - - Appliances; Furniture; Other Consumer Durables


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