Capital investment in many countries is tax favored. For example, in 1989, Singapore allowed a 100% tax depreciation write off in the year of purchase for certain automated production equipment. Similar tax treatment was allowed on a variety of capital expenditures in the United Kingdom during the early 1980s. How do investment tax credits and liberal depreciation allowances affect the required before tax rates of return on investment? Could the risk adjusted before tax rates of return on investment be lower than the tax exempt riskless bond rate in equilibrium? Why or why not? Could the risk adjusted before tax rate of return on investment be higher than the before tax riskless bond rate? Why or why not?
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