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Asymmetric taxation of profits and losses and its influence on investment timing: Paradoxical effects of tax increases

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  • Mehrmann, Annika
  • Schneider, Georg
  • Sureth, Caren
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    Abstract

    Applying a time-discrete investment model and a setting with an entry and an exit option and cash flow uncertainty we present a dynamic analysis of the impact of various loss offset regimes on risky investment timing decisions. We find that a tax system with loss offset restrictions will not distort timing decisions if the investor can exit the project. By contrast, in a setting without exit flexibility a tax discrimination against losses can cause paradoxical effects. In that respect, we analytically identify conditions for higher taxes to increase investors' propensity to choose early investment and hence accelerate entrepreneurial investment. --

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    Bibliographic Info

    Paper provided by arqus - Arbeitskreis Quantitative Steuerlehre in its series arqus Discussion Papers in Quantitative Tax Research with number 134.

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    Date of creation: 2012
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    Handle: RePEc:zbw:arqudp:134

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    Related research

    Keywords: asymmetric taxation; loss offset restrictions; timing flexibility; investment decisions; uncertainty; tax effects;

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    1. Paolo M. Panteghini, 2005. "Asymmetric Taxation under Incremental and Sequential Investment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 761-779, December.
    2. Agliardi, Elettra & Agliardi, Rossella, 2008. "Progressive taxation and corporate liquidation policy," Economic Modelling, Elsevier, Elsevier, vol. 25(3), pages 532-541, May.
    3. Paolo Panteghini, 2001. "On Corporate Tax Asymmetries and Neutrality," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 2(3), pages 269-286, 08.
    4. Cooper, Michael & Knittel, Matthew, 2006. "Partial Loss Refundability: How Are Corporate Tax Losses Used?," National Tax Journal, National Tax Association, vol. 59(3), pages 651-63, September.
    5. Paolo M. Panteghini, 2001. "Corporate Tax Asymmetries under Investment Irreversibility," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 58(3), pages 207-, July.
    6. Pennings, Enrico, 2000. "Taxes and stimuli of investment under uncertainty," European Economic Review, Elsevier, Elsevier, vol. 44(2), pages 383-391, February.
    7. Luis H. R. Alvarez & Erkki Koskela, 2008. "Progressive Taxation, Tax Exemption, and Irreversible Investment under Uncertainty," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(1), pages 149-169, 02.
    8. Agliardi, Elettra, 2001. "Taxation and Investment Decisions: A Real Options Approach," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 40(1), pages 44-55, March.
    9. Stefan Hirth & Marliese Uhrig-Homburg, 2010. "Investment Timing when External Financing is Costly," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 37(7-8), pages 929-949.
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