RDP 8907: Tax Policy and Housing Investment in Australia Appendix I

MODELLING A REAL CAPITAL GAINS TAX

The firm's value at time t, V_t in the absence of a capital gains tax is given by,

Now let us assume that a capital gains tax is paid by the firm on its own value as real capital gains accrue. V is a nominal value and we divide by a price index, P_s to arrive at the real value. The value of the firm paying a real capital gains tax at rate c is the present value of after-tax cash flows where tax includes the capital gains tax.

We integrate by parts the second term of the above integral: