Sooner or Later? – Paradoxical Investment Effects of Capital Gains Taxation under Simultaneous Investment and Abandonment Flexibility

Niemann, Rainer; Sureth, Caren

doi:10.1080/09638180.2012.682781

Cited by 19 publications

(15 citation statements)

References 30 publications

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“…This is surprising against the background of the recent …ndings on the economic implications of pro…t taxation on investments in risky projects. Prior literature identi…ed parameter-dependent, partially subsidizing as well as discriminating e¤ects of pro…t taxation on risky investments that are due to uncertainty (for example, Alvarez and Koskela 2008, Schneider and Sureth 2010, Gries et al 2012, Niemann and Sureth 2013. These …ndings indicate that tax reforms that are intended to foster investment such as tax rate cuts, may have dysfunctional e¤ects on investment activities, in particular in high-risk industries.…”

Section: Introductionmentioning

confidence: 99%

“…Whereas the e¤ects of pro…t (or income) taxation under uncertainty are well known since the late 1990s (for example , Niemann 1999a, 1999b, Sureth 1999, Pennings 2000, Agliardi 2001, Panteghini 2001, 2004, Sureth 2002, Niemann and Sureth 2004, Alvarez and Koskela 2008, Schneider and Sureth 2010, Gries, Prior, and Sureth 2012, Niemann and Sureth 2013, the e¤ects of wealth taxes have not yet been investigated under conditions of uncertainty and irreversibility. This is surprising against the background of the recent …ndings on the economic implications of pro…t taxation on investments in risky projects.…”

Section: Introductionmentioning

confidence: 99%

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Investment Effects of Wealth Taxes Under Uncertainty and Irreversibility

Niemann

Sureth-Sloane

2015

SSRN Journal

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The growing dissatisfaction with perceived distributional inequality and budgetary constraints gave rise to a discussion on the (re-)introduction of wealth taxes. Wealth taxes are typically levied on private wealth, in some countries also on corporate wealth. To avoid misleading statements concerning possible distributional consequences of wealth taxes, preceding analyses of the economic and particularly investment e¤ects are necessary. As investments drive job creation, tax-induced changes in investment timing may signi…-cantly a¤ect the income and wealth distribution. We analyze the impact of wealth taxes on investment timing under uncertainty and irreversibility and the propensity to carry out risky projects. Using a Dixit/Pindyck type real options model we …nd that wealth taxes have real e¤ects. This means that higher wealth tax rates can either stimulate or depress the propensity to invest in risky projects. We …nd that apparently paradoxical wealth tax e¤ects (accelerated investment due to higher wealth tax rates) are more likely for low interest rates and for high-risk investments. Using either historical cost or fair value accounting may a¤ect investment timing ambiguously. Thus, the design of wealth taxes is crucial for the resulting delay or acceleration of investment. Although our model takes an individual perspective, our …ndings are also relevant for the current tax policy discussion on the introduction of wealth taxes. Our results indicate that wealth taxes are particularly harmful for speci…c classes of investments, for example low-risk investments.JEL classi…cation: H25; H21

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Investment Effects of Wealth Taxes Under Uncertainty and Irreversibility

Niemann

Sureth-Sloane

2015

SSRN Journal

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“…Merging both types of options, simultaneous entry and exit flexibility are modeled by Schneider and Sureth (2010) and Niemann and Sureth (2013), who use binomial models. Schneider and Sureth (2010) find that an increased profit tax can foster investor willingness to invest in a project with an abandonment option.…”

Section: Prior Literaturementioning

confidence: 99%

Can Tax Rate Increases Foster Investment Under Entry and Exit Flexibility? - Insights from an Economic Experiment

2014

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ABSTRACT:It is well-known that taxes affect risky investment decisions. Analytical studies indicate that tax rate increases (decreases) can foster (hinder) investment if there is flexibility, in particular when an exit option is available. We design an experiment based on an analytical model with binomial random walk and entry and exit flexibility. Contrasting the underlying model, we find accelerated investment, which is often considered as an increased willingness to invest, on tax rate increases to be independent of the existence of an exit option. However, we observe this investor reaction only for a tax increase, not for a tax decrease. This behavior is driven possibly by tax salience and the mechanisms known from the theory of irreversible choice under uncertainty. Our empirical evidence suggests that the at-first-sight unexpected tax reform effects are more common than is predicted by the theoretical literature. Policy makers should therefore carefully consider the behavioral aspects when anticipating taxpayer reactions. JEL Classification: H25, H21, C91

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“…Jacob (2013) To summarize, prior literature offers mixed results on the impact of taxes on holding and exit decisions. Already Niemann and Sureth (2013) illustrate that the capital gains taxation under certain conditions can accelerate investments in simultaneous entry and exit decisions. In contrast to our study they neither distinguish between different tax systems and nor focus on the impact of profit retention rates, which we identify as important drivers for holding decision.…”

Section: Introductionmentioning

confidence: 99%

“…He illustrates that the optimal holding in a given stock depends on the individual deferral terms, accrued capital gains and the expected holding periods of all investors. Also, Niemann and Sureth (2013) examine the impact of capital gains taxation on investment timing under simultaneous investment and abandonment flexibility. They show numerically that capital gains taxation accelerates risky investment under specific conditions, e.g., high liquidation proceeds, more conservative tax accounting, low interest rates, and low volatilities (Cremer et al 2010).…”

Section: Introductionmentioning

confidence: 99%

Impact of Capital Gains Taxation on the Holding Period of Investments Under Different Tax Systems

et al. 2015

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. the worst exit time which should be avoided by investors. We find that while often an immediate sale is optimal longer holding periods may be beneficial under certain conditions. Terms of use: Documents inBeyond the well-known impact of the retention policy we clarify that the minimal holding period particularly depends on the degree of income and corporate tax integration. We find, e.g., a high retention rate to extend the minimum holding period under a shareholder relief tax system but is likely to accelerate sales under a classic corporate tax system. These results help to anticipate the economic implications of capital gains taxes on investment.Obviously, depending on the underlying tax system the after-tax profitability of long-term and sustainable investments is particularly affected by capital gains taxes. These results are interesting for both investors and tax politicians.

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Sooner or Later? – Paradoxical Investment Effects of Capital Gains Taxation under Simultaneous Investment and Abandonment Flexibility

Cited by 19 publications

References 30 publications

Investment Effects of Wealth Taxes Under Uncertainty and Irreversibility

Investment Effects of Wealth Taxes Under Uncertainty and Irreversibility

Can Tax Rate Increases Foster Investment Under Entry and Exit Flexibility? - Insights from an Economic Experiment

Impact of Capital Gains Taxation on the Holding Period of Investments Under Different Tax Systems

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