In this paper, we derive a measure of the efficiency cost of taxing risky capital incomein an infinite horizon stochastic model. The resulting measure differs from all those thathave been proposed in the existing literature. It can be represented by the expression-sigma(s) T(s)c(deltaX(s)),...

-sigma(s) T(s)c(deltaX(s)), where T(s) measures the present value of the taxes that would be paid on a unit of investment in a riskless project with the same expected depreciation rate and tax treatment as capital invested in period s, X(s), while c(X(s)) represents the certainty equivalent to...