Tax Neutrality and the Social Discount Rate: A Suggested Framework

Abstract

There is probably no specific problem in tax analysis which has generated as much study and discussion among economists as the question of how to formulate "neutral" tax incentives for investment. Yet no consensus has been reached concerning the proper approach to take when adjusting taxes. Comparing the two fundamental notions of neutrality found in the literature, referred to here as "present value" rules and "internal rate of return" rules, we argue that there is both a single appropriate neutrality criterion (the latter) and a framework which can be used to evaluate the performance of a tax system with respect to this criterion.