Progressive Taxation and Irreversible Investment Under Uncertainty

21 Pages Posted: 14 Jan 2005

See all articles by Erkki Koskela

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Luis Hernan Radomiro Alvarez

University of Turku - Turku School of Economics

Date Written: January 2005

Abstract

We analyze the impact of progressive taxation on irreversible investment under uncertainty. We show that if tax exemption is lower than sunk cost, higher tax rate will decelerate optimal investment by increasing the optimal investment threshold, while if tax exemption exceeds sunk cost, three different regimes arise. For small volatilities the optimal investment threshold is a positive function of volatility, but independent of tax rate. For medium volatilities it is independent of both tax rate and volatility. Finally, for high volatilities the optimal investment threshold depends positively on volatility, but negatively on tax rate so that we have tax paradox.

Keywords: Irreversible investments under uncertainty, progressive taxation

JEL Classification: G31, H25, D80

Suggested Citation

Koskela, Erkki and Radomiro Alvarez E., Luis Hernan, Progressive Taxation and Irreversible Investment Under Uncertainty (January 2005). CESifo Working Paper Series No. 1377. Available at SSRN: https://ssrn.com/abstract=648504

Erkki Koskela (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358 9 191 8894 (Phone)
+358 9 191 8877 (Fax)

HOME PAGE: http://www.cesifo.de/servlet/page?_pageid=56&_dad=portal30&_schema=PORTAL30&pa_id=7298

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bank of Finland - Research Department ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Luis Hernan Radomiro Alvarez E.

University of Turku - Turku School of Economics ( email )

Rehtorinpellonkat 3
FIN-20500 Turku
Finland

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