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Wide vs. Narrow Tax Bases under Optimal Investment Timing

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  • Paolo Panteghini

Abstract

This article compares an ACE system with a CBIT system in an open economy. Using a real-option approach we show that, if a firm can decide when to invest, a tradeoff is found. According to traditional wisdom, a high-income firm investing in an ACE system faces a heavier tax burden at each instant. On the other hand, it finds it optimal to invest earlier, thereby enjoying a longer stream of income. If, given the same tax burden, the latter effect is great enough, the firm will prefer the ACE system. In this article we also run a simulation which shows that preference for an ACE system is a realistic result.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2004/wp-cesifo-2004-07/cesifo1_wp1246.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1246.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1246

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Keywords: corporate taxation; open economy; timing and real options.;

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References

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  1. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June.
  2. Paolo Panteghini, 2002. "Endogenous Timing and the Taxation of Discrete Investment Choices," CESifo Working Paper Series 723, CESifo Group Munich.
  3. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
  4. Robin Boadway & Neil Bruce, 1982. "A General Proposition on the Design of a Neutral Business Tax," Working Papers 461, Queen's University, Department of Economics.
  5. Robert S. Pindyck, 2004. "Mandatory Unbundling and Irreversible Investment in Telecom Networks," NBER Working Papers 10287, National Bureau of Economic Research, Inc.
  6. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
  7. Paolo M. Panteghini, 2003. "A dynamic measure of the effective tax rate," Economics Bulletin, AccessEcon, vol. 8(15), pages 1-7.
  8. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, 06.
  9. Steve Bond & Michael Devereux, 1999. "Generalised R-based and S-based taxes under uncertainty," IFS Working Papers W99/09, Institute for Fiscal Studies.
  10. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
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Cited by:
  1. Luis H. R. Alvarez & Erkki Koskela, 2005. "Progressive Taxation and Irreversible Investment under Uncertainty," CESifo Working Paper Series 1377, CESifo Group Munich.

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