Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/18741
Authors: 
Alvarez, Luis H. R.
Koskela, Erkki
Year of Publication: 
2005
Series/Report no.: 
CESifo Working Paper 1377
Abstract: 
We analyze the impact of progressive taxation on irreversible investment under uncertainty. We show that if tax exemption is lower than sunk cost, higher tax rate will decelerate optimal investment by increasing the optimal investment threshold, while if tax exemption exceeds sunk cost, three different regimes arise. For "small" volatilities the optimal investment threshold is a positive function of volatility, but independent of tax rate. For "medium" volatilities it is independent of both tax rate and volatility. Finally, for "high" volatilities the optimal investment threshold depends positively on volatility, but negatively on tax rate so that we have "tax paradox".
Subjects: 
irreversible investments under uncertainty
progressive taxation
JEL: 
D80
H25
G31
Document Type: 
Working Paper

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