Abstract: This introductory chapter shows how the concept of cost of capital arises in the management of capital as a factor of production. The concept is introduced of an effective tax rate within a highly simplified system for taxation of income from capital. A tax wedge is defined as the difference between the remuneration of capital before taxes, which corresponds to the marginal product of capital, and the compensation after taxes available to holders of financial claims on the firm. The effective tax rate is the ratio of this tax wedge to the marginal product. The chapter is organized as follows: it first outlines the contents of the following chapters, and then goes on to present simple economic analyses of cost of capital, capital as a factor of production, rates of return and capital income taxation.

Keywords: capital income taxation, cost of capital, effective tax rate, factor of production, marginal product, rate of return, tax wedge, taxation,