Inflation and Incentive to Invest in Capital Assets

in Capital Assets Poonam Gupta Sanjeev Gupta The purpose of this study is to estimate the marginal effective tax rates for different asset classes and change in user cost with inflation. Such calculations enable a study of the effect of inflation and other allowances like depreciation, investment allowance, etc, on incentive to invest. The results show that the effective tax rates in- crease with inflation but at a decreasing rate. Secondly, inflation increases the dispersion in the effective tax rates causing the tax system to become more non-neutral. A tax system is then suggested which is neutral and compensates for the price increases.