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On the Bias of the Corporate Tax against High-Risk Projects

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  • Heaton, Hal

Abstract

This paper demonstrates that the impact of the existing tax law is not uniform across projects with different variances of payoffs. A bias exists against projects with greater uncertainty of payoffs, which leads to an underinvestment in high risk projects. The bias against higher variance projects offers a theoretical justification for such tax incentives as the research and development tax credit.

Suggested Citation

  • Heaton, Hal, 1987. "On the Bias of the Corporate Tax against High-Risk Projects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(3), pages 365-371, September.
    • Handle: RePEc:cup:jfinqa:v:22:y:1987:i:03:p:365-371_01
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    Cited by:

    1. B. Anthony Billings, 1994. "Economic Impact of Taxes On Financial Characteristics of the Natural Resources Industry," Public Finance Review, , vol. 22(4), pages 439-461, October.
    2. Garven, James R. & Louberge, Henri, 1996. "Reinsurance, Taxes, and Efficiency: A Contingent Claims Model of Insurance Market Equilibrium," Journal of Financial Intermediation, Elsevier, vol. 5(1), pages 74-93, January.
    3. Rozycki, John J., 1997. "A tax motivation for smoothing dividends," The Quarterly Review of Economics and Finance, Elsevier, vol. 37(2), pages 563-578.
    4. Fochmann, Martin & Kiesewetter, Dirk & Sadrieh, Abdolkarim, 2012. "Investment behavior and the biased perception of limited loss deduction in income taxation," Journal of Economic Behavior & Organization, Elsevier, vol. 81(1), pages 230-242.
    5. Fochmann, Martin & Hemmerich, Kristina, 2014. "Real tax effects and tax perception effects in decisions on asset allocation," arqus Discussion Papers in Quantitative Tax Research 156, arqus - Arbeitskreis Quantitative Steuerlehre.
    6. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    7. Hlouskova, Jaroslava & Tsigaris, Panagiotis, 2020. "Capital income taxation under full loss offset provisions of a prospect theory investor," IHS Working Paper Series 11, Institute for Advanced Studies.

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