Consumption-Based Tax Systems and Investment Neutrality: Does the Corporation Income Tax Depreciation Method Impact Investment Capital Value?

Abstract

In this paper we investigate the neutrality of tax allowances by considering the Croatian and the German profit taxes. Our mathematical analysis shows that in the Croatian system, neutrality cannot be attained by the allowance for corporate equity if the tax free rate of interest does not equal the individual discount rate. The sensitivity analysis shows that in the Croatian system, the profitability of early tax reductions by tax write-offs falls below the profitability in the German system by a maximum of only 2.5 percentage points. In the system that provides an allowance for corporate equity, the profitability of an early tax reduction is high enough to influence investment decisions.