If corporate profit were defined as the real price of capital minus the properly defined cost of capital, then:
A)having a tax on corporate profits would be more favourable to investment than having no tax at all.
B)having a tax on corporate profits would be less favourable to investment than having no tax at all.
C)having a tax on corporate profits would leave investment incentives the same as having no tax at all.
D)whether a corporate profits tax was more or less favourable for investment than no tax at all would depend on the rate of tax.

Question

Quizplus · Accepted Answer

A tax on corporate profits would leave investment incentives the same as having no tax at all because the tax would simply reduce the real price of capital by the amount of the tax, leaving the properly defined cost of capital unchanged.

If Corporate Profit Were Defined as the Real Price of Capital