Integrating Income Taxes into Finance

Deborah Schanz () and Sebastian Schanz ()
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Deborah Schanz: Chair of Taxation and Accounting
Sebastian Schanz: University of Magdeburg

Chapter Chapter 3 in Business Taxation and Financial Decisions, 2011, pp 79-135 from Springer

Abstract: Abstract Investment decisions may be wrong when they are made without taking taxes into account. In this chapter, we present the well-known Standard Model. The Standard Model is a simple investment model that integrates income taxes. The previous chapter deals with various investment criteria before taxes; now, we present different investment decision criteria extended by taxes. Using the Standard Model we explain why taxes distort investment decisions. In this context, we explain the income tax paradox which describes increasing after-tax net present values due to taxes. The reason for this distortion can be found in three effects: The tax rate effect, the tax base effect, and the timing effect. Furthermore, we define marginal tax rates and average tax rates. Due to nonlinearity of typical individual income tax rate functions, they differ from each other. Depending on the type of the decision, the marginal or the average tax rate needs to be calculated. At the end of the chapter, we extend the Fisher–Hirshleifer Model from the previous chapter by integrating taxes.

Keywords: Interest Rate; Lending Rate; Interest Income; Real Investment; Real Investment Project (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-642-03284-4_3

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DOI: 10.1007/978-3-642-03284-4_3

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