Neutral Taxation under Uncertainty - a Real Options Approach

Rainer Niemann

FinanzArchiv: Public Finance Analysis, 1999, vol. 56, issue 1, 51-66

Abstract: This paper analyses neutral tax systems under uncertainty and risk neutrality using real option theory. In the case of an option to invest, the investment problem can be formulated before and after taxes, demonstrating the effects of flexibility and irreversibility. A sufficient condition for tax neutrality is the equivalence of the investment problems before and after taxes. Under this condition, neutral depreciation schedules can be derived for every kind of interest taxation without explicitly solving the emerging free-boundary problems. Two special cases of neutral tax systems are the cash flow tax and the Johansson-Samuelson tax. For the validity of the Johansson-Samuelson theorem under uncertainty and irreversibility it is necessary to extend the depreciation base on the real option.

Date: 1999
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