Asymmetric taxation of profits and losses and its influence on investment timing: Paradoxical effects of tax increases

Annika Mehrmann, Georg Schneider and Caren Sureth

No 134, arqus Discussion Papers in Quantitative Tax Research from arqus - Arbeitskreis Quantitative Steuerlehre

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.

Keywords: asymmetric taxation; loss offset restrictions; timing flexibility; investment decisions; uncertainty; tax effects (search for similar items in EconPapers)
JEL-codes: H21 H25 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-pbe, nep-ppm and nep-pub
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Citations: View citations in EconPapers (1)

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