The User Cost of Capital With Imperfect Loss Offset Taxes
The effect of imperfect loss offsetting in corporate and personal tax law is analyzed. In a two-period model with technical uncertainty, the cost of capital is derived taking into account taxes, inflation and risk. Imperfect loss offsetting could raise the cost of capital and deter investment. Comparative statics for risk neutrality are obtained, analyzing the impact of a increase in mean preserving risk, corporate tax rates and a loss offsetting parameter on investment and the financial decisions of firms.
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