Wide vs. Narrow Tax Bases Under Optimal Investment Timing
20 Pages Posted: 23 Aug 2004
Date Written: July 2004
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 tradeoff 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 which shows that preference for an ACE system is a realistic result.
Keywords: corporate taxation, open economy, timing and real options
JEL Classification: H25, H32
Suggested Citation: Suggested Citation