Скачать или смотреть Macroeconomics | BBE | Lesson 12 : Investment Tax Credit | Corporate Income Tax

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This lesson discusses taxes and investment. The tax code can shift the demand function and influence Aggregate Demand. The lesson explains the two of the most important provisions of corporate taxation. First, the Corporate Income Tax and Second, the Investment Tax Credit. It is important for the 4th semester macroeconomics BBE students of Delhi University. It is relevant for other courses like BBA, Economics hons, for the graduation and post graduation level and for competitive exams like CUET Economics, IAS economics optional, Indian Economic Service and the NET JRF Economics aspirants.

The Corporate Income Tax:

It is imposed on corporate profits. The effect of corporate income tax on investment depends on how the law defines “profit” for the purpose of taxation.

(i) Law and firms defines profit in the same manner that is:

Profit = Rental Price - Cost of Capital

Then even though firms will be sharing a fraction of their profits with the government, it would still be rational for firms to invest if the rental price is greater than the cost of capital and vice-versa.

Thus, a tax on profit measured in this way, would not alter investment incentives.

(ii) The difference may arise between firms definition and law’s definition of profits. This may be due to various factors, one is the way depreciation is treated: while the firm takes

depreciation as the Current value but the corporate tax laws deduct depreciation using historical cost that is based on the price of capital when it was originally purchased.

Thus, in periods of inflation: Replacement Cost becomes greater than Historical Cost, so corporate tax tends to understate the cost of depreciation and overstate the profits. This makes owning capital less attractive.

However, policymakers often change rules governing the corporate income in an attempt to encourage investment or at least mitigate the disincentive the tax provides. One such was is:

Investment Tax Credit: A tax provision that reduces a firm’s taxes by a certain amount of each dollar spent on capital goods, thus, in a way credit reduces the effective purchase price of a unit of capital Pk .

Thus, the investment tax credit reduces the cost of capital and raises investment.

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