Question

1. Assume that you work for a large manufacturing company that utilizes both capital (K) and Labor (L) in the production process. Explain how a tax on capital would affect your operations and how you would estimate the welfare effects on your company.
2. Many make the argument that although perfectly competitive markets achieve the highest level of social welfare, because markets are never perfectly competitive, society is worse off from using market-based systems.

Answer 1

Dear Student,

In following various ways capital Expenditures and Taxes implication can be explained

Affect your operations

Businesses usually prefer to take tax deductions for purchases of business assets currently rather than spread them out over time. But the IRS has strict rules on what costs can be immediately expensed. As noted above, the IRS usually wants the costs of buying capital assets to be capitalized and spread out.

For tax purposes, capital expenditures are typically depreciated, but under Section 179 of the IRS code, under certain circumstances, some capital expenditures may be considered current operating expenses.

The sale of capital assets results in a capital gain or loss, depending on the basic value of the asset and its sale price. Capital gains and losses are taxed at a different rate than operating income.

These are ordinary business expenses. called operating expenses. But the cost of repairing a piece of equipment to improve its condition adds to its value, so that's a capital expense.

For example, if you buy office supplies for your business, that purchase is an operating expense, because office supplies don't typically last more than one year (although you may have those boxes of staples lying around for a long time). On the other hand, if you buy office furniture, it is expected that it will last longer than a year, so you are buying a fixed asset, and that purchase is considered a capital expense.

Welfare Effects on your company

The sale of capital assets results in a capital gain or loss, depending on the basic value of the asset and its sale price. So if the capital assets have marginal valuation compare to market price it will lead to profit to company and generate profit / welfare.

Thank You !!