A General Proposition on the Design of a Neutral Business Tax

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Abstract
A business tax is neutral if it does not effect the firms' decisions at the margin. We analyze the effect of a business tax on the firms' investment decision. The "implicit rent deduction" and "immediate write-off" methods are found to be special cases of our general tax design. The implication of our results is that a neutral "pure profits" tax can be levied without the informational difficulties of the implicit rent deduction method or the cash flow disadvantages of the immediate write-off method. The general tax design remains neutral in the presence of adjustment costs, but only the implicit rent deduction method is neutral in the face of anticipated tax rate changes.
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