Answer to Question #147911 in Macroeconomics for Atif Saeed

Question

So far we have ignored taxes from our investment decisions, but for a firm the real interest rate, depreciation rate acts a user cost of capital and Benefit is measure by MARGINAL PRODUCTIVITY OF CAPITAL.

AS A RULE: the form maximizes the profit by comparing the user cost of capital with the benefit.

What if tax is Imposed on capital. What will happen?

(1-π) is the tax rate imposed on MPK?

What will the equation look like of MPK after tax look like: (1-π) MPK

Solve it for the desired capital stock:

(1-π) MPK= (r+ d)Pk/P

SOLVE IT FOR MPK dividing (1-π) on both sides

We will get

MPK={ (r+ d)Pk/P}1/(1-π)

Now tax is also added into the cost of capital

Answer 1

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