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http://hdl.handle.net/10419/27057
  
Title:Taxation of risky investment and paradoxical investor behavior PDF Logo
Authors:Gries, Thomas
Prior, Ulrich
Sureth, Caren
Issue Date:2007
Series/Report no.:Arqus-Diskussionsbeiträge zur quantitativen Steuerlehre 26
Abstract:Under uncertainty and irreversibility, real option-based models are widely accepted for assessing investment projects. So far the existing post-tax analyses do not provide a general analytical description of investor reactions towards profit tax rate changes. This paper sets out to fill part of the void. We implement a simple tax system and focus on risky capital market investment and an option to wait. Taxes affect risk-free and risky capital market investment asymmetrically and hence cause distortions. We analytically identify a set of neutral tax rates (tax regimes) that preserve the critical post-tax investment threshold in case of tax rate changes as well as general normal and paradoxical settings. Unlike for other tax paradoxa neither depreciation rules nor loss offset restrictions are responsible for the observed paradoxical reaction. Identifying normal and paradoxical tax regimes can be regarded as a first step to a generalized description of tax effects under uncertainty, both for individual project evaluation as well as for understanding tax effects on an aggregate level.
Subjects:investment decision
real options
tax paradox
uncertainty
JEL:H25
H21
Document Type:Working Paper
Appears in Collections:arqus Diskussionsbeiträge zur Quantitativen Steuerlehre

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