Local neutrality of corporate tax systems

Abstract

This paper shows one important result, namely, that corporate tax systems that allow at least for two sources of investment tax deductions (e.g., accelerated arbitrary investment depreciation and deductibility of part of interest payments on the firm`s debt) can be, under certain plausible conditions, locally neutral. That is, they allow for the existence of at least one positive corporate tax rate that renders the user cost of capital equal to the undistorted (without taxes) level of this cost.