Types of Tax Concessions for Promoting Investment in Free Economic and Trade Areas

10

where the current investment cost at year u is Ce^πu.

The difference between nPV(t)0^sld and nPV(t)0^sld* is defined as the present value of
additional corporate tax burden (inflation losses) at year 0 (ATB0^sld), which is caused by
the fictitious profit. With the economic life of a capital good Γ*, therefore

1_-e-{μ(1-t)-∏}Γ*    ι_-e-μ(1-t)Γ*

(11)   ATB(Γ*)osld = tC[---] = tC(FPo^sld) ,

{μ(1-t) -π}Γ*    μ(1-t)Γ*

where FP0^sld indicates the present value of fictitious profit per monetary unit at year 0 in
the case of adopting straight-line depreciation. In order to examine whether and to what
extent generous tax depreciation provisions promote private investments in inflationary
situations, the value FP0^sld (with Γ*) can be adopted as the benchmark.

When the amount of annual depreciation expense is calculated on the basis of historical
cost, the incentive effect of accelerated depreciation on private investment in an
inflationary phase can be measured by

(12)   nPV(t)0^ad - nPV(t, Γ*)0^sld

σ{1-e^-μ(^1-t)}    e^-μ(^1-t)^r* - e^^(1-w

= tC [—————— + ————————] = tC(IE0^ad) ,
μ(1-t)             μ(1-t)Γ*

where nPV(t)0^ad is the nominal present value of the asset with accelerated depreciation at
year 0 and Ω* denotes the reduced tax-life of a capital good, when Γ = Γ*.

With free depreciation,

(13)   nPV0^fd - nPV(Γ*)0^sld

1-e^-μ(^1-t)           1-e^-μ(^1-t)^r

= tC{—————— - ——————} = = tC(IE0^fd) ,

μ(1-t)            μ(1-t)Γ*

where nPV0^fd indicates the nominal present value of the asset with free depreciation at year
0.

When investment tax allowance is adopted and the tax-life of a capital good is Γ*,

(14)   nPV0^ita - nPV(Γ*)0^sld

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