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

11

β{1-e^-μ(^1-t)}

= tC[——————] = tC(IE0^ita) ,
μOO

where nPV0^ita is the nominal present value of the asset with investment tax allowance at
year 0.

Subsequently, generous tax concession measures simply compensate the inflation losses
in full-scale when

(15)    IE0^ad = FP0^sld

(16)    IE0^fd = FP0^sld

(17)    IE0^ita = FP0^sld .

In spite of inflation, tax concession rules shown above guarantee investment promotion
effects when IE values (i.e. IE0^ad, IE0^fd and IE0^ita ) are greater than FP0^sld.

Model Simulation

Table 1 illustrates NPV under different tax concession measures calculated using standard
parameter assumptions in an economy without inflation (i.e. π = 0). The derived ranking
of investment promotion effects (i.e. the extent of tax paradox) varies from one measure to
another in the investigated range of corporate tax rates. For example, free depreciation
provides the highest NPV within a range of tax rates between 10% to 45%, while the same
value under investment tax allowance is highest when t = 50%. Accelerated depreciation
guarantees a higher NPV than investment tax allowance does, when, for example, t =
10%.

Repeatedly, the application of the historical cost accounting method in calculating the
corporate tax base causes fictitious profits in inflationary phases that are also subject to
tax. For example, in spite of inflation the ‘true’ incentives can be guaranteed by free
depreciation under the given parameter assumptions including t = 20%, when π reaches
approximately 25% (Table 2). However, with the same tax rate accompanied by π = 14%,
the promotion effects of accelerated depreciation disappears altogether. Furthermore the
stimulation of private investment through the adoption of investment tax allowance cannot
be expected when the inflation rate is higher than 7%. Additional tax burden positively
correlates with the tax rate by the given inflation rate. As a result, the compensation of

<<   8   9   10   11   12   13   14   >>

More intriguing information