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Taxation, Inflation and the User Cost of Capital in Canada

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  • Robin Boadway
  • Neil Bruce
  • Jack Mintz

Abstract

This paper analyzes corporate and personal income taxes and inflation on the cost of investing in depreciable and inventory capital in Canada in 1963-78. Changes in rates of inflation and corporate tax rates theoretically have an ambiguous effect on the cost of capital. Tax depreciation and FIFO allowances based on historical prices can increase capital costs with inflation and decrease capital costs with corporate tax rates. Assuming all capital is owned by Canadian residents we find the gross of tax return to capital has not changed much in Canada over time for all types of capital considered. Effective tax rates were also measured, these vary considerably by type of capital and over time

Suggested Citation

  • Robin Boadway & Neil Bruce & Jack Mintz, 1982. "Taxation, Inflation and the User Cost of Capital in Canada," Working Papers 506, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:506
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    References listed on IDEAS

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    1. L. G. Godfrey & M. R. Wickens, 1981. "Testing Linear and Log-Linear Regressions for Functional Form," Review of Economic Studies, Oxford University Press, vol. 48(3), pages 487-496.
    2. Davidson, Russel & MacKinnon, James G., 1983. "Small sample properties of alternative forms of the Lagrange Multiplier test," Economics Letters, Elsevier, vol. 12(3-4), pages 269-275.
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    Cited by:

    1. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-940, September.
    2. Don Fullerton, 1983. "Which Effective Tax Rate?," NBER Working Papers 1123, National Bureau of Economic Research, Inc.

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