Understanding Investment Incentives Under Parallel Tax Systems: An Application to the Alternative Minimum Tax

Abstract

The first section of this paper introduces the topic. The next section shows that many parallel tax systems share common features and constructs a general model of the cost of capital based on the Hall-Jorgenson (1967) cost of capital formula. Section 3 presents conditions under which a parallel tax system maintains investment neutrality. In general, the neutrality conditions are sensitive to the assumed arbitrage conditions and source of finance. Section 4 presents findings on the effect of the corporate ANT on investment incentives. It is shown that these investment incentives are sensitive to the length of time the firm is subject to the ANT, the timing of the Mt spell relative to the date the investment is acquired, and the source of financing. Investment incentives for firms experiencing temporary spells on the ANT can be very different from those for firms permanently subject to the ANT. The final section briefly summarizes the paper