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The Neutrality of Business Taxation in the Presence of Capital Adjustment Costs and Risk

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  • Kenneth J. McKenzie

Abstract

The investment neutrality conditions of an imputed profits tax, which grants ex ante depreciation allowances, are examined in the presence of income and capital risk and capital adjustment costs. Neutrality may be achieved with a cost of finance deduction on the full market value of the firm, but at a risk-free interest rate plus depreciation allowances based on the ex ante rate of economic depreciation. The ex ante economic depreciation rate is a certainty equivalent, reflecting the systematic and unsystematic income and capital risk characteristics of the investment.

Suggested Citation

  • Kenneth J. McKenzie, 1989. "The Neutrality of Business Taxation in the Presence of Capital Adjustment Costs and Risk," Working Paper 759, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:759
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