Many countries' income tax systems consist of multiple tax schedules that comprise a parallel tax system. For instance, one firm may face a given statutory rate and set of depreciation rules while another firm faces a different tax rate and set of rules. As income varies, a firm may switch from one set of rules to another. Progressive marginal tax schedules, rules on loss limitations, and minimum tax schedules are all examples of parallel tax systems. Taxpayers who switch across tax schedules of a parallel tax system may face investment incentives either greater or less than those of other taxpayers who are permanently subject to a single tax schedule. The article derives several different conditions under which a parallel tax system can be established that maintains neutral investment incentives for all taxpayers.
