CAPITAL THEORY, CORPORATE TAXATION, AND CAPACITY EXPANSION

In: Kyklos: international review for social sciences, Band 19, Heft 2, S. 219-230

Abstract

SUMMARYThe author makes net investment an increasing function of the marginal efficiency of capital affected by the corporate tax and accelerated depreciation, and then lets that investment enter the growth equation as an independent variable. Thus he shows that the corporate tax rate or the length of the period of accelerated depreciation will have to be reduced if the rate of growth of productive capacity is to be increased in a capital‐scarce market economy.Further the author brings out two implications. First, considering the tax‐afforded depreciation reserves as a definite fraction of national income, the resulting ratio is added to the private saving ratio so as to increase capacity growth. This first implication is thought important to a developing economy whose personal saving is insufficient to finance the net investment required for capacity expansion. The second of the implications is brought out by making externally raised capital funds an increasing function of tax‐influenced dividend payments. Considering such capital funds as a fraction of national income on a par with the personal saving ratio, the author demonstrates the theoretical possibility of the low corporate tax favorable influencing capacity expansion. He points out that this second implication is especially important to an economy whose securities market is highly developed but whose long‐term bank financing is relatively underdeveloped. He alludes to some relevant empirical evidence as supporting his theoretical arguments.