Inflation, Depreciation and the Neutrality of the Corporate Income Tax
The treatment of depreciation allowances, interest deductions and capital gains in the corporate income tax base may have a strong impact on the user cost of capital and hence on the firm’s investment decisions—particularly when inflation and interest rates are high and fluctuating. A few general conditions for neutrality—confined to exponential depreciation schedules—are given in the literature. In this paper, these conditions are reconsidered in a broader perspective by (a) specifying general depreciation functions, (b) employing the concept “neutrality locus” to represent the class of tax systems which ensure neutrality in a given situation, and (c) stating some results on equivalent tax systems. Numerical results based on Norwegian data are reported.
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