Wide versus Narrow Tax Bases under Optimal Investment Timing
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 trade-off 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 that shows that preference for an ACE system is a realistic result.
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Volume (Year): 60 (2004)
Issue (Month): 4 (December)
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