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Capital Gains and After‐Tax Internal Rates of Return
Author(s) -
Robison Lindon J.,
Hanson Steven D.
Publication year - 1992
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/1242579
Subject(s) - economics , depreciation (economics) , monetary economics , investment (military) , tax credit , deferred tax , tax basis , discounting , internal rate of return , tax rate , net present value , microeconomics , tax reform , econometrics , state income tax , production (economics) , public economics , finance , capital formation , gross income , profit (economics) , financial capital , politics , political science , law
Net present value models are constructed by discounting the after‐tax cash flows of a challenging investment by the after‐tax internal rates of return (IRRs) of a defending investment. After‐tax IRRs calculated for a defending investment are shown to depend on the defender's capital gains and allowable depreciation. The often recommended adjustment to the before‐tax IRRs of one minus the marginal income tax rate is not generally applicable. Failure to correctly adjust the discount rates (the defender's IRRs) for taxes may result in incorrect inferences from comparative static models and incorrect investment valuations from empirical models. Tax rate adjustments for farmland, stocks, and bonds are shown to be different and to have varied over time.