The Tax Paradox and Weak Tax Neutrality |
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| Authors: | Ramón E López Pablo Gutiérrez Cubillos Eugenio Figueroa |
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| Institution: | 1. Department of Economics, Faculty of Business and Economics, University of Chile, Diagonal Paraguay 257 Of. 1404, Santiago, 833015, Chile;2. Vancouver School of Economics, University of British Columbia, 6000 Iona Drive, Vancouver, BC V6T 1L4, Canada;3. E-mail: pgutiecu@mail.ubc.ca;4. Department of Economics, Faculty of Business and Economics, University of Chile, Diagonal Paraguay 257 Of. 1506, Santiago, 833015, Chile |
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| Abstract: | We introduce the concept of weak tax neutrality that establishes that the relationship between the tax rate and the user cost of capital may be non-monotonic. We show that most existing corporate tax systems allow for weak neutrality. That is, given the tax allowances permitted by these systems, it is possible that neutrality may arise for at least one positive corporate tax rate. Moreover, we show the practical relevance of weak neutrality in realistic situations where there are several asset types and heterogeneous levels of firms' debt ratios. |
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