CRITERIA FOR EFFICIENT CAPITAL ALLOCATION.

This article discusses the effect of different forms of investment incentive on the composition of the capital stock among assets differing in durability in Great Britain. At first sight different prescriptions for non-discriminatory fiscal investment incentives appear to derive from different criteria for neutrality. The difference in the recommendations advanced in the recent literature is attributed to a different specification of the comparison across competing assets. The net present value and internal rate of return criteria yield identical results. The significance of these results for policy purposes is a matter which requires fuller consideration. Neutrality is neither an end in itself for synonymous merely with a fiscal system which does not discriminate among different durability of capital. The concept of and rationale for a neutral tax system are readily comprehensive; the justification for a system which is neutral in some respects but not others is considerably more elusive.