Inflation, Depreciation and the Neutrality of the Corporate Income Tax

  • Erik Biørn
Part of the Scandinavian Journal of Economics book series (SJE)

Abstract

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.

Keywords

Income 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Bergström, V. & Södersten, J.: Taxation and the real cost of capital. Scandinavian Journal of Economics 84, 443–456, 1982.CrossRefGoogle Scholar
  2. Biørn, E.: Gross capital, net capital, capital service price, and depreciation. A framework for empirical analysis. Report 83/27, Central Bureau of Statistics, Oslo, 1983.Google Scholar
  3. Boadway, R. W.: Corporate taxation and investment: A synthesis of the neo-classical theory. Canadian Journal of Economics 13, 250–267, 1980.CrossRefGoogle Scholar
  4. Boadway, R. W. & Bruce, N.: Depreciation and interest deductions and the effect of the corporate income tax on investment. Journal of Public Economics 11, 93–105, 1979.CrossRefGoogle Scholar
  5. Eisner, R.: Components of capital expenditure: Replacement and modernization versus expansion. Review of Economics and Statistics 54, 297–305, 1972.CrossRefGoogle Scholar
  6. Feldstein, M.: Inflation, tax rules and investment: Some econometric evidence. Econometrica 50, 825–862, 1982.CrossRefGoogle Scholar
  7. Feldstein, M. S. & Foot, D. K.: The other half of gross investment: replacement and modernization expenditures. Review of Economics and Statistics 53, 49–58, 1971.CrossRefGoogle Scholar
  8. Feldstein, M. S. & Rothschild, M.: Towards an economic theory of replacement investment. Econometrica 42, 393–423, 1974.CrossRefGoogle Scholar
  9. Griliches, Z.: Capital stock in investment functions: Some problems of concept and measurement. In Measurement in Economics: Studies in mathematical economics and econometrics in memory of Yehuda Grunfeld (ed. C. F. Christ et al.), pp. 115–137. Stanford University Press, Stanford, 1963.Google Scholar
  10. Hall, R. E. & Jorgenson, D. W.: Tax policy and investment behavior. American Economic Review 57, 391–414, 1967.Google Scholar
  11. Hartman, R.: Investment neutrality of business income taxes. Quarterly Journal of Economics 92, 245–260, 1978.CrossRefGoogle Scholar
  12. Jorgenson, D. W.: The theory of investment behavior. In Determinants of investment behavior (ed. R. Ferber). National Bureau of Economic Research, New York, 1967.Google Scholar
  13. King, M. A.: Taxation, corporate financial policy, and the cost of capital. A comment. Journal of Public Economics 4, 271–279, 1975.CrossRefGoogle Scholar
  14. Musgrave, R. A.: The theory of public finance. McGraw-Hill, New York, 1959.Google Scholar
  15. Samuelson, P. A.: Tax deductibility of economic depreciation to insure invariant valuations. Journal of Political Economy 72, 604–606, 1964.CrossRefGoogle Scholar
  16. Sandmo, A.: Investment incentives and the corporate income tax. Journal of Political Economy 82, 287–302, 1974.CrossRefGoogle Scholar
  17. Smith, V. L.: Tax depreciation policy and investment theory. International Economic Review 4, 80–91, 1963.CrossRefGoogle Scholar

Copyright information

© The Scandinavian Journal of Economics 1985

Authors and Affiliations

  • Erik Biørn
    • 1
  1. 1.University of OsloNorway

Personalised recommendations