Adjustment costs and the neutrality of income taxes
Date
2006
Authors
Benge, Matt
Fane, George
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Abstract
A yes income tax would not affect asset values or investment decisions for given values of cash flows and pre-tax interest rates (Samuelson, 1964). However, most so-called income taxes do not fully tax capital gains on accrual. This note shows that in the absence of adjustment costs, investment decisions are not distorted by the lack of a comprehensive tax on the capital gains on unimproved land, provided that the depreciation of improvements is allowed as a tax deduction. It also provides the intuition underlying the closely related results of Hartman (1978) and Abel (1983).
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income tax, capital gains tax, investment neutrality
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Working/Technical Paper
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