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

See all articles by Annika Mehrmann

Annika Mehrmann

University of Paderborn

Georg Thomas Schneider

University of Graz

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business

Date Written: July 17, 2012

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.

Suggested Citation

Mehrmann, Annika and Schneider, Georg Thomas and Sureth-Sloane, Caren, Asymmetric Taxation of Profits and Losses and its Influence on Investment Timing: Paradoxical Effects of Tax Increases (July 17, 2012). Available at SSRN: https://ssrn.com/abstract=2111475 or http://dx.doi.org/10.2139/ssrn.2111475

Annika Mehrmann (Contact Author)

University of Paderborn ( email )

Warburger Str. 100
D-33098 Paderborn
Germany

Georg Thomas Schneider

University of Graz ( email )

Austria

Caren Sureth-Sloane

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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