On the Bias of the Corporate Tax against High-Risk Projects

Hal Heaton

Journal of Financial and Quantitative Analysis, 1987, vol. 22, issue 3, 365-371

Abstract: This paper demonstrates that the impact of the existing tax law is not uniform across projects with different variances of payoffs. A bias exists against projects with greater uncertainty of payoffs, which leads to an underinvestment in high risk projects. The bias against higher variance projects offers a theoretical justification for such tax incentives as the research and development tax credit.

Date: 1987
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