How Taxes on Firms Reduce the Risk of After-Tax Cash Flows

Diderik Lund

FinanzArchiv: Public Finance Analysis, 2014, vol. 70, issue 4, 567-598

Abstract: Most firms use one discount rate applied to expected net after-tax cash flows. The need to adjust for differences in risk, other than leverage, is commonly neglected. There can be substantial effects of taxation on after-tax risk when there are depreciation deductions. Among the few studies of these effects, even fewer identify all effects correctly. When marginal investment is taxed together with inframarginal, the marginal beta for the Capital Asset Pricing Model differs from the average. The problems identified here imply that currently suggested tax reforms may fail. Tax neutrality results rely on firms correctly discounting for risk, in particular the risk of tax deductions.

Keywords: cost of capital; WACC; loss offset; tax shields; options (search for similar items in EconPapers)
JEL-codes: F23 G31 H25 (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://www.mohrsiebeck.com/en/article/how-taxes-o ... 1628001522114x685492 (text/html)
Fulltext access is included for subscribers to the printed version.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mhr:finarc:urn:sici:0015-2218(201412)70:4_567:htofrt_2.0.tx_2-e

Ordering information: This journal article can be ordered from
Mohr Siebeck GmbH & Co. KG, P.O.Box 2040, 72010 Tübingen, Germany

DOI: 10.1628/001522108X685492

Access Statistics for this article

FinanzArchiv: Public Finance Analysis is currently edited by Alfons Weichenrieder, Ronnie Schöb and Jean-François Tremblay

More articles in FinanzArchiv: Public Finance Analysis from Mohr Siebeck, Tübingen
Bibliographic data for series maintained by Thomas Wolpert ().