Asymmetric Taxation of Profits and Losses and its Influence on Investment Timing: Paradoxical Effects of Tax Increases
39 Pages Posted: 18 Jul 2012 Last revised: 19 Jul 2012
Date Written: July 17, 2012
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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By Karen Alpert