Changing the Economic Impact of Current Incentives

Abstract

The other way to improve investment and productivity is to leave the incentives unchanged but change their impact on investment. Managements would be encouraged to invest if this raised EPS more than buy-backs and TSRs more than dividends. These aims would be achieved by making all investment allowable as an expense for corporation tax in the year the money was spent. The depreciation charged in company accounts would not rise but the tax charge would fall the higher the level of investment. The basic rate of corporation tax would have to rise to offset the loss of revenue, but this could be limited by disallowing interest as an expense. This would be a great benefit as it encourages excessive leverage and buy-backs.