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Progressive Taxation and Irreversible Investment under Uncertainty

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Author Info
Luis H. R. Alvarez ()
Erkki Koskela ()
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".

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1377.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1377

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Related research
Keywords: irreversible investments under uncertainty; progressive taxation;

Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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  1. Luis H. R. Alvarez & Erkki Koskela, 2004. "Taxation and Rotation Age under Stochastic Forest Stand Value," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Paolo Panteghini, 2001. "Corporate Tax Asymmetries under Investment Irreversibility," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Gilbert E. Metcalf & Kevin A. Hassett, 1995. "Investment Under Alternative Return Assumptions: Comparing Random Walks and Mean Reversion," NBER Technical Working Papers 0175, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Niemann, Rainer & Sureth, Caren, 2004. "Tax neutrality under irreversibility and risk aversion," Economics Letters, Elsevier, vol. 84(1), pages 43-47, July. [Downloadable!] (restricted)
  5. Paolo Panteghini, 2002. "Asymmetric Taxation under Incremental and Sequential Investment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  6. Hassett, Kevin A & Metcalf, Gilbert E, 1999. "Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?," Economic Journal, Royal Economic Society, vol. 109(457), pages 372-93, July. [Downloadable!] (restricted)
    Other versions:
  7. Alvarez JR, Luis & Kanniainen, Vesa & Södersten, Jan, 2000. "Why is the Corporation Tax Not Neutral? Anticipated Tax Reform, Investment Spurts and Corporate Borrowing," Working Paper Series 2000:4, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  8. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March. [Downloadable!] (restricted)
  9. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Paolo Panteghini, 2002. "Endogenous Timing and the Taxation of Discrete Investment Choices," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  11. Paolo Panteghini, 2004. "Wide vs. Narrow Tax Bases under Optimal Investment Timing," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  12. Alvarez, Luis H. R. & Kanniainen, Vesa & Sodersten, Jan, 1998. "Tax policy uncertainty and corporate investment: A theory of tax-induced investment spurts," Journal of Public Economics, Elsevier, vol. 69(1), pages 17-48, July. [Downloadable!] (restricted)
  13. Pennings, Enrico, 2000. "Taxes and stimuli of investment under uncertainty," European Economic Review, Elsevier, vol. 44(2), pages 383-391, February. [Downloadable!] (restricted)
  14. Caren Sureth, 2002. "Partially Irreversible Investment Decisions and Taxation under Uncertainty: A Real Option Approach," German Economic Review, Blackwell Publishing, vol. 3(2), pages 185-221, 05. [Downloadable!] (restricted)
  15. Agliardi, Elettra, 2001. "Taxation and Investment Decisions: A Real Options Approach," Australian Economic Papers, Blackwell Publishing, vol. 40(1), pages 44-55, March. [Downloadable!] (restricted)
  16. Lund, Diderik, 1992. "Petroleum taxation under uncertainty: contingent claims analysis with an application to Norway," Energy Economics, Elsevier, vol. 14(1), pages 23-31, January. [Downloadable!] (restricted)
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  17. Paolo Panteghini, 2001. "On Corporate Tax Asymmetries and Neutrality," German Economic Review, Blackwell Publishing, vol. 2(3), pages 269-286, 08. [Downloadable!] (restricted)
    Other versions:
  18. Mackie-Mason, Jeffrey K., 1990. "Some nonlinear tax effects on asset values and investment decisions under uncertainty," Journal of Public Economics, Elsevier, vol. 42(3), pages 301-327, August. [Downloadable!] (restricted)
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