beyond gdp the quest for a measure of social welfare this paper critically examines the various approaches to the measurement of individual well being and social welfare that have been considered for the construction of alternatives to gdp special attention is devoted to recent developments in the analysis of sustainability in the study of happiness in the theory of social choice and fair allocation and in the capability approach it is suggested in the conclusion that although convergence toward a consensual approach is not impossible for the moment not one but three alternatives to gdp are worth developing jel i31 e23 e01

s based taxation under default risk abstract this article studies the characteristics of a s based tax system under default risk in particular we show that its neutrality properties depend on whether debt is protected or unprotected in the former case this system is neutral in the latter case where default timing is optimally chosen by shareholders the s based system is neutral with respect to real decisions only if the firm s and the lender s tax rate are equal however the shareholders decision to default is always distorted

taxation of outbound direct investment economic principles and tax policy considerations this paper reviews economic principles for optimality of the taxation of international profit from both a global and national perspective it argues that for traditional systems based on the residence of the investor or the source of the income nothing less than full harmonisation across countries can achieve global optimality the conditions for national optimality are more difficult to identify but are most likely to imply source based taxation however source based taxation requires an allocation of the profits of multinational companies to individual jurisdictions this is not only very difficult in practice but in some cases is without any conceptual foundation the taxation of interest income on a residence basis is also hard to justify if the aim of the tax system is to tax only the income arising from economic activity in a given country

depreciation rules and value invariance with extractive firms the application of samuelson s theorem on value invariance to the case of intertemporally optimizing firms is shown to require a judiciously chosen economic depreciation formula which depends on both current stock and current flow variables in order to prevent the firms from changing their actions in the face of the tax regime we illustrate by deriving depreciation rules which achieve non distortingness of actions and value invariance for resource extracting firms

neutral taxation under uncertainty abstract the analogs under uncertainty of two well known certainty results are derived first if there are timing differences between tax payments and accruals neutrality is preserved if the resulting tax credits or liabilities are carried forward at the risk free interest rate provided that tax credits and liabilities are sure to be redeemed eventually second the invariance of asset valuations with respect to the rate of income tax at a given pre tax interest rate proved by johansson and samuelson under certainty can be extended to cover the case of uncertainty given analogous ceteris paribus conditions

accelerated depreciation and the efficacy of temporary fiscal policy implications for an inflationary economy abstract the effect on investment of temporary tax rate changes depends on the age profile of depreciation deductions if the depreciation allowance schedule is accelerated then temporary cuts in the corporate tax rate could reduce investment inflation causes the age profile of real depreciation deductions to become accelerated and thus could make temporary tax cuts have a contractionary effect on investment two currently proposed reforms are shown to exacerbate this effect under each of these proposals temporary tax cuts are likely to have opposite effects on investment in short lived and long lived capital thereby complicating the conduct of countercyclical fiscal policy

education and economic declin 1890 1980s over the last hundred years or so there has been a persistent belief that the relative decline of the british economy has been underlain by defects in our education the argument that i wish to put forward here is that whatever the defects of technical and scientific education in the 1870s and 1880s the situation radically improved in the 1890s and 1900s and it is fallacious to regard the whole period 18701914asoneinwhichdefectsofprovisionhinderedindustrialperformance the more lasting problem was not so much the provision of technical education as the willingness of employers to receive its products this was compounded by the liberal education values entrenched in the education of the upper classes at the public schools and oxford the focussing by historians on the defects of the pre 1914 period has also diverted attention from perhaps the most serious issue of all namely the failure in the twentieth century to develop a technical education for teenagers of school age

growth and the effects of inflation abstract in this paper we study the relationship between the rate of increase of the money supply and the rate of growth of output in an economy we show that in some models of endogenous growth inflation has direct effects on the growth rate of the economy despite this the estimated welfare cost of inflation from calibrated examples is similar to that found in exogenous growth models

taxes inflation and the durability of capital the choice of capital durability is affected by the rate of inflation because nominal depreciation deductions are based on historical cost rather than replacement cost this paper analyzes a model with competitive firms and demonstrates that an increase in the rate of inflation will lead to an increase in the durability of capital if the ratio of the nominal discount rate to the rate of depreciation exceeds a critical value however if this ratio is less than the crucial value this effect is reversed the effect of costs of adjustments on the crucial value is analyzed

a general proposition on the design of a neutral business tax abstract a simple and general means of levying a business tax that is neutral in the sense that it does not affect the firm s decisions at the margin is discussed in particular we analyze the effect of a business tax of our design on the investment decision of the firm the well known imputed income and immediate write off methods of levying a neutral business tax are found to be special cases of our general tax design the implication of our results is that a neutral pure profits tax can be levied without the informational difficulties of the imputed income method or the cash flow disadvantages of the immediate write off method

splitting up value a critical review of residual income theories this paper deals with the notion of residual income which may be defined as the surplus profit that residues after a capital charge opportunity cost has been covered while the origins of the notion trace back to the 19th century in depth theoretical investigations and widespread real life applications are relatively recent and concern an interdisciplinary field connecting management accounting corporate finance and financial mathematics peasnell 1981 1982 peccati 1987 1989 1991 stewart 1991 ohlson 1995 arnold and davies 2000 young and o byrne 2001 martin petty and rich 2003 this paper presents both a historical outline of its birth and development and an overview of the main recent contributions regarding capital budgeting decisions production and sales decisions implementation of optimal portfolios forecasts of asset prices and calculation of intrinsic values a most recent theory the systemic value added approach also named lost capital paradigm provides a dierent denition of residual income consistent with arbitrage theory en folded in keynes s 1936 notion of user cost and forerun by pressacco and stucchi 1997 the theory has been formally introduced in magni 2000a b c 2001a b 2003 where its properties are thoroughly investigated as well as its relations with the standard theory two different lost capital metrics have been considered for value based management purposes by drukarczyk and schueler 2000 and young and o byrne 2001 this work illustrates the main properties of the two theories and their relations and provides a minimal guide to construction of performance metrics in the two approaches

on the design of a neutral business tax under uncertainty this paper extends the results of boadway and bruce journal of public economics 1984 24 231 239 and fane journal of public economics 1987 33 95 105 to describe a tax on business profits which is neutral with respect to investment and wind up decisions and default outcomes under uncertainty and bankruptcy risk the tax base allows deductions for depreciation and the cost of finance but requires knowledge of neither true economic depreciation nor the firm s required rate of return we show that the tax must treat taxable profits and losses symmetrically and that the tax rate must be a known constant even in the special case when the tax base coincides with the economic rent earned in each period

productivity and long term growth potential in the uk economy 1924 1968 this paper examines the long term structural determinants of labour productivity for the uk economy using a panel data set from 1924 to 1968 trade union product market competition and human capital explanations are embedded within the model and compared labour quality or human capital is found to be the most important of the explanations considered

budget deficits corporate income taxes and the current account this paper studies the effects of budget deficits financed by taxing corporate incomes as households are finitely lived transfers and taxes on personal incomes are discounted at a higher rate than the interest on government debt as corporations are infinitely lived taxes on corporations are discounted at the same rate as the interest on government debt thus unanticipated deficits financed by taxing corporate incomes are neutral anticipated deficits financed by taxing corporations cause a current account surplus as transfers are then discounted at a higher rate than the taxes shifting taxes from households to corporations causes a current account surplus copyright 1995 by ohio state university press

viewpoint innovations in the theory and practice of redistribution policy we present a survey of key results from second best optimal redistribution theory and their implications for tax transfer policy the core results include the corlett hague theorem the deaton conditions the production efficiency theorem the atkinson stiglitz theorem and the mirrlees saez characterization of the optimal non linear income tax system these have been augmented in recent years by optimal participation tax rates the implications of involuntary unemployment the use of unconventional instruments such as minimum wages in kind transfer and workfare and the optimal taxation of capital income and bequests l auteur presente un survol des principaux resultats theoriques de la redistribution optimale de second ordre et de leurs implications pour les politiques d imposition et de transferts les resultats fondamentaux incluent le theoreme de corlett hague les conditions de deaton les theoremes d efficacite en production le theoreme d atkinson stiglitz ainsi que la caracterisation du systeme optimal d imposition non lineaire du revenu a la mirrlees saez ces derniers resultats ont ete enrichis au cours des dernieres annees par certains autres portant sur les taux d imposition decoulant des allocations conditionnelles les implications du chomage involontaire l usage d instruments non conventionnels tels que le salaire minimum les transferts en nature le workfare ainsi que l imposition optimale des revenus du capital et des legs ces resultats sont exposes et leurs implications pour les politiques d imposition et de transferts sont discutees

taxes and the quality of capital abstract this paper shows that tax policy toward investment by changing the relative prices of capital varieties even within narrow classes of equipment can have a direct effect on the quality composition of capital goods that firms purchase detailed data on farming mining and construction machinery suggest that this impact is economically important firms significantly shift investment toward higher quality varieties when they receive investment subsidies and do not do so when investment is high for other reasons in the aggregate all of the new investment generated by tax subsidies appears to come from firms shifting to higher quality capital goods rather than buying a larger number of their existing capital types the paper also applies a methodology for calculating the implied deadweight loss from the quality distortion and shows that its magnitude may represent a substantial efficiency cost from capital taxation that is neglected in conventional work

filling potholes macroeconomic effects of maintenance versus new investments in public infrastructure abstract the maintenance of existing public infrastructure has often been neglected in favor of building new infrastructure in developing countries this paper develops a dynamic general equilibrium model that analyzes the reasons and effects of such neglect first the optimal level of maintenance is shown to depend on the size of new investments as a share of existing public infrastructure and on the productivity of infrastructure second the model is parameterized and solved numerically for a sample of latin american countries quantitative results show that reallocating funds from new infrastructure to maintenance can have positive effects on these countries gdp

taxation of asset income in the presence of a world securities market abstract this paper examines a capm model of world security prices in which governments recognize their ability to influence international security prices via their tax treatment of foreign and domestic investors in this model governments have the incentive to set tax rates such that investors tend to specialize in domestic securities and to restrict net capital flows between countries each country does this to increase the utility of domestic residents taking as given the tax policies of other governments but the net outcome is a reduction in world efficiency and likely a reduction in the utility of all investors

generalised r based and s based taxes under uncertainty this paper considers the relationship between two general neutral business tax structures which we label the firm tax and the shareholder tax the well known r based and s based cash flow taxes analysed by meade 1978 are special cases of these two taxes we demonstrate the neutrality of both taxes in the presence of uncertainty and characterise the tax rules required in the event of default and wind up our analysis provides the first proof of the neutrality of the s based cash flow tax and the allowance for corporate equity ace corporation tax under uncertainty we also discuss implementation and tax avoidance issues

problems with integrating corporate and personal income taxes in an open economy abstract this paper analyzes income tax integration in a small open economy when agents exploit all legal tax arbitrage opportunities the analysis shows that integration does not accomplish the objectives that have been attributed to it instead of eliminating the double taxation of equity income it simply removes the primary taxation of savings done through the corporation the analysis has implications for the choice of a personal tax base and for the design of the corporate tax

tax policy and capital allocation summary the purpose of this paper is to analyze the impact of u s tax policy on the efficiency of capital allocation to achieve this objective we employ an intertemporal general equilibrium model of the u s economy implemented econometrically for annual data covering the period 1955 1980 we present a detailed model of the provisions of u s tax law applicable to income from capital we use intertemporal equilibrium paths corresponding to alternative tax policies to evaluate proposals for tax reform we find that dramatic gains in economic welfare would result from a shift from direct to indirect taxation

time consistent taxation in a dynastic family model with human and physical capital and a balanced government budget this paper analyzes optimal time consistent taxation in a dynastic family model with human and physical capital and with a balanced government budget when tax revenue is used for publicly provided consumption or lump sum transfers leisure would be higher than its social optimum pareto optimal taxation requires taxing capital income more heavily than labour income and subsidizing investment at the same rate of the tax also it requires either subsidizing labour at the same rate as a consumption tax or subsidizing consumption at the same rate as a labour income tax and hence it is not a practical guide to policy further a consumption tax or equivalently a uniform income tax with investment subsidies at the same rate can be improved on by taxing capital income more heavily than labour income ce memoire analyse la fiscalite optimale et consistante dans le temps dans un modele de famille dynastique avec capital humain et physique et un budget gouvernemental equilibre quand le revenu fiscal est utilise pour financer la consommation publique ou pour des transferts forfaitaires le niveau de loisir sera plus eleve que l optimum social la fiscalite optimale paretienne exige qu on taxe le revenu du capital plus fortement que celui du travail et qu on subventionne l investissement au meme taux que la taxe elle exige aussi soit qu on subventionne le travail au meme taux que la taxe a la comsommation soit qu on subventionne la consommation au meme taux que l impot sur le revenu du travail et donc ce n est pas un guide pratique pour la politique de plus un regime de taxe sur la consommation ou de maniere equivalente d impot uniforme sur le revenu avec subvention a l investissement au meme taux peut etre ameliore en taxant le revenu du capital plus fortement que celui du travail

the role and design of the corporate income tax proposals for tax reform have focused on the role of the corporate tax as either i a tax on pure profits or ii a withholding tax against certain forms of income capital gain income or income accruing to nonresidents little attention has been paid to reconciling these two functions we discuss how both functions can be combined so that the corporate tax can collect revenue from economic rents and withhold income at the same time we explicitly consider both nonfinancial firms and financial intermediaries

invariant valuation when tax rates change over time samuelson 1964 proved that if and only if depreciation for tax purposes is equal to economic depreciation will any two taxpayers with different tax rates value an asset equally he referred to this condition as invariant valuation that is the valuation of an asset with a given stream of receipts is independent of the tax rate of the individual under this condition the tax system does not provide any one taxpayer a greater or lesser incentive to undertake investment than any other taxpayer samuelson s proof pertained only to the case of taxpayers with different but constant tax rates as he noted all of this analysis presupposes a tax rate that is uniform over time for each person obviously if a man is to be subject to different rates with the tax rate being a function of time his optimal decision will be distorted by this fact a proper system of carry forwards and carrybacks which makes the tax rate average out to a constant and which takes account of just when a man pays the tax accruing to him will avoid such distortions p 605 under many circumstances taxpayers statutory tax rates may change over time individuals and corporations are subject to graduated tax rates minimum tax rules and restrictions on tax losses it is shown in section i that if tax rates are allowed to change over time but samuelson s other assumptions are maintained economic depreciation continues to result in invariant valuation without the need for carryforwards or carrybacks 2 that is if tax rates vary across taxpay

czechoslovakia recent economic developments and prospects czechoslovakia provides a unique example of a country that became underdeveloped as a result of an externally imposed system before world war ii czechoslovakia was a democracy with gnp per capita similar to that of belgium and austria its industries were on the technological edge and its products were known worldwide for their superb workmanship by 1990 czechoslovak gnp per capita is estimated by the world bank at 3 300 thus being comparable to that of venezuela gabon and yugoslavia but only slightly above one fifth of that of austria and belgium 1 most czechoslovak products are now of mediocre quality and selling at a discount if at all in the west this remarkable transition occurred over approximately 40 years during the postworld war ii reconstruction the country was still run as a market economy although major parts of industry banking and insurance were already nationalized after the 1948 communist takeover soviet type economic planning was imposed the remaining private enterprises were nationalized 2 and priority was given to heavy industry czechoslovak foreign trade was reoriented from world markets toward soviet bloc countries the czechoslovak government adhered to the soviet type planning system faithfully throughout the 1950 s the economic slowdown in the early 1960 s led to a series of reform attempts that culminated during the prague spring of 1968 with a short lived and partial program of price liberalization separation of economic policy from political decision making enterprise autonomy and workers participation in enterprise management however central planning was reimposed after the 1968 invasion and remained virtually intact until the late 1980 s

corporate taxation and the cost of holding inventories this paper investigates the impact of the corporate tax system and inflation upon the user cost of holding inventories a simple dynamic model of the firm is set up in which the firm chooses an output and an inventory policy so as to maximize its equity value the firm finances its inventory stock through equity and debt expressions for the user cost of inventory capital are derived when the firm is allowed fifo and lifo accounting for tax purposes it is shown that an increase in the inflation rate will reduce the user cost under lifo but will have an ambiguous effect under fifo increases in the corporate tax rate have an ambiguous effect on the user cost we then examine circumstances under which corporate taxation and inflation will not alter the inventory and output decisions the model is extended to include personal taxation and the inventory deduction and a numerical calculation of the user cost of capital using stylized facts for canada is given impot slur les societes et coait des inventaires ce m6moire 6tudie l impact du systeme d imposition des soci6t6s et de l inflation sur les cofits d inventaires on developpe un modele dynamique de l entreprise dans lequel la firme choisit un niveau de production et une politique d inventaires de facon h maximiser la valeur de l avoir des actionnaires l entreprise finance ses inventaires par capital actions et par emprunts les cofits d inventaires sont d6riv6s sous l un et l autre des r6gimes de comptabilit6 permis aux fins du calcul de l imp6t le r6gime fifo first in first out et le r6gime lifo last in first out on montre que l acc6leration du taux d inflation r6duit les cofuts d inventaires en r6gime lifo mais a des effets ambigus en r6gime fifo l impact sur les cofits d inventaires d un accroissement du taux d imposition sur les soci6t6s est aussi ambigu les auteurs s attachent a etablir les conditions dans lesquelles l imposition des societ6s et l inflation n affectent pas les d6cisions quant au niveau de production ou h la politique d inventaires le modele de base est enrichi pour pouvoir tenir compte de l imp6t personnel et des degrevements permis sur les inventaires et les auteurs ajoutent un exemple num6rique du calcul des cofits d inventaires pour un contexte stylis6 approximant le cas canadien an earlier version of this paper was presented at stanford university and at the canadian economics association meetings in halifax the authors are grateful to participants at these presentations and to the editors and referees of this journal for many useful suggestions and comments financial assistance from the sshrc is gratefully acknowledged car dian journal of economics revue canadienne d economique xv no 2 may mai 1982 printed in canada imprim6 au canada 0008 4085 82 0000 0278 01 50 1982 canadian economics association this content downloaded from 157 55 39 203 on wed 14 jun 2017 18 06 46 utc all use subject to http about jstor org terms corporate taxation and the cost of holding inventories 279

how did the notional interest deduction affect belgian smes capital structure the recently introduced risk capital allowance in belgium which allows a notional interest deduction to be denoted nid hereafter on a firm s adjusted equity for tax purposes has mitigated the tax discrepancy between equity and debt financing to our knowledge we provide the first empirical study of the extent to which this regulation has resulted in a strengthening of small and medium sized enterprises to be denoted smes hereafter solvency which was one of its most prominent objectives results from logit regressions reveal that the probability of adopting the nid is higher for lowly leveraged smes smes without experience with the tax exempt investment reserve and smes with a sound knowledge of the notional interest deduction regulation results on the impact of the nid on the capital structure of smes based on panel and first differences regressions reveal that this measure did not result in a significant change of smes leverage in view of the discussion regarding the optimal tax and legislative framework that governments should put in place poutziouris et al j small bus enterp dev 6 1 7 25 1999 these results cast doubt on the risk capital allowance as it stands now being the right government instrument to contribute at least in the short term to creating a pro enterprising tax and legislative climate for smes we conclude by providing some general suggestions for improving the effectiveness of the risk capital allowance

the tax paradox and weak tax neutrality we introduce the concept of weak tax neutrality that establishes that the relationship between the tax rate and the user cost of capital may be non monotonic we show that most existing corporate tax systems allow for weak neutrality that is given the tax allowances permitted by these systems it is possible that neutrality may arise for at least one positive corporate tax rate moreover we show the practical relevance of weak neutrality in realistic situations where there are several asset types and heterogeneous levels of firms debt ratios

the ineffectiveness of effective tax rates on business investment a critique of feldstein s fisher schultz lecture abstract in his fisher schultz lecture martin feldstein 1982 examined the effects of non neutral tax rules on business investment by estimating three econometric models and he concluded that the rising rate of inflation has because of the structure of existing u s tax rules substantially discouraged investment in the past 15 years in a detailed examination of feldstein s effective tax rate model and a less extensive review of his other formulations neoclassical and return over cost we advance a number of important and independent criticisms and find that these three models fail to support feldstein s conclusion that taxes have exerted a significantly depressing effect on net investment during the recent inflation episode

analytical issues in external financing alternatives for sbes as the amount of information about an enterprise is generally not neutral with respect to firm size financiers have problems to identify the default risk associated with a borrower or to have control over a borrower s investments this review paper analyses how various control mechanisms are fit to reduce this information problem and how various types of capital suppliers are endowed to finance small business enterprises

marginal effective tax rates for capital in the canadian mining industry the authors model a firm that explores develops and extracts a depletable asset taking into account various features of canadian corporate and ontario and quebec mining tax law they derive the user cost of capital and effective tax rate for investments undertaken by a mining firm calculations based on 1985 tax law show that there is considerable dispersion in effective tax rates most being negative especially for processing assets the authors conclude that these taxes have been very poor collectors of mining rents compared to a neutral cash flow tax coauthors are neil bruce ken mckenzie and jack mintz

the climacteric in late victorian britain and france a reappraisal of the evidence the paper investigates the question of whether the trend rate of growth of gdp slowed down in britain or france in the nineteenth century we establish that real gdp belongs to the trend stationary process class of time series in each case rather than the difference stationary process and using kalman filter techniques analyse trends in a model incorporating time varying parameters without specifying breakpoints in advance we find contrary to the literature that neither country experienced a climacteric our results suggest that economic historians have been prone to exaggerated views of variations in trend economic growth

an empirical approach to the financial behaviour of small and medium sized companies this paper shows how the financial behaviour of small and medium sized companies is influenced by size and business sector this idea underlies two research approaches to capital structure i credit rationing and ii the pecking order theory both approaches are based on asymmetric information and have been widely developed over the past two decades an analysis has been carried out on 1000 valencian companies that were randomly selected from the state company registry these companies were divided by size before analysis as an innovation the investigation implements a multivariate manova model that takes into account two key variables in the financing of small and medium firms our results show that size influences company self financing strategies and that business sector influences short term financial policy

economic reform in czechoslovakia should we believe in santa klaus czechoslovakia david begg between the wars czechoslovakia was a prosperous market economy important legacies remain but 40 years of planning have caused severe distortions can czechoslovakia again become the jewel in the crown of eastern europe reforms began later than in hungary and poland but are now proceeding apace traditional sequencing of reforms is unwise micro reforms deserve greater priority and themselves affect macro credibility monetary and fiscal policies are intended to be tight but worries remain wage indexation a fuzzy exchange rate commitment and rising unemployment enterprise reform divides into better internal and external incentives privatization will be impeded by restoration of property to former owners and in any case is insufficient problems of corporate control will remain and inadequate attention is being given to incentives for state owned enterprises better external incentives require more foreign competition still limited tougher domestic competition policy still inadequate attention to banks and credit where bankruptcy is hard to enforce and balance sheets should be restructured and a temporary wage subsidy activities with negative value added at world prices should cease other activities would be more efficiently supplied through imports i discuss the principles governing the pace of intelligent restructuring and assess the prospects for its success in czechoslovakia

the economic transition of czechoslovakia from plan to market the communist government of czechoslovaki a was ousted in the socalled velvet revolution of november 1989 and the new regime adopted as its goal the transformation of the economy to one based on markets and private property and also one more dynamic and productive than its predecessor this unprecedented transformation poses a variety of intellectual political and economic questions at the same time that the economic system is being transformed the government must also ensure that the hybrid economy that exists during the transition functions sufficiently well to maintain adequate living standards and to sustain political support for the reform process in this paper i examine the economic and intellectual legacies that have shaped the transition process in czechoslovaki a describe the system changes implemented or contemplated for the near future and briefly comment on macroeconomic performance

evaluating the effects of ace systems on multinational debt financing and investment abstract theory recommends aligning the tax treatment of debt and equity a few countries notably belgium have introduced an allowance for corporate equity ace to achieve tax neutrality we study the effects of adopting an ace on debt financing passive investment and active investment of multinational firms using high quality administrative data on virtually all german based multinationals we use two main identification strategies based on 1 synthetic control methods and 2 variations across affiliates within the multinational group our results suggest that an ace reduces the corporate debt ratio of multinational affiliates additionally an ace increases intra group lending and other forms of passive investment but has no effects on production investment of multinational affiliates the findings indicate that a unilateral implementation of an ace system generates a tax planning opportunity using a structure combining the benefits from the ace with interest deductions

a theory of discouraged borrowers this paper examines the implications for the sme financing market of application costs that vary between firms and of imperfect screening of applicants by banks under these conditions discouraged borrowers can exist these are good borrowers who do not apply for a bank loan because they feel they will be rejected the paper shows that under a range of assumptions the scale of discouragement in an economy depends upon the screening error of the banks the scale of application costs and the extent to which the bank interest rate differs from that charged by the moneylender discouragement is shown to be at a maximum where there is some but not perfect information

on the neutrality of flow of funds corporate taxation real income earning business activities of firms rather than the financial ones furthermore it has virtually ignored the implications of the financial structure of the firm for the neutrality of flow of funds taxation of both real and financial activities of the firm in a model of the firm in which the financial structure has been explicitly included we shall be particularly concerned with the sorts of flow of funds tax systems suggested by the meade report the so called r and r f bases we will show that whether the investment decision is distorted under such corporate tax bases depends on how the financial structure of the firm is determined the r base is neutral under some financial constraints while the r f base is neutral under others 3 we also extend the analysis to incorporate personal taxes impinging on capital income and the effects of inflation finally we introduce financial assets held by the firm we show that the r base can be generalized to what we call the r a base this base will be neutral under the same borrowing constraints for which the r base is neutral in general the r f base as defined in the meade report will not capture all the profits arising from financial intermediation and may