Taxation, Inflation and the User Cost of Capital in Canada
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
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