Tax neutrality under irreversibility and risk aversion

Niemann, Rainer

doi:10.1016/s0165-1765(04)00029-1

Cited by 16 publications

(20 citation statements)

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“…As a consequence, rising tax rates increase the value of a risky investment (so-called tax paradox, Schneider 1992, p. 246). Related approaches, like real option models, support this finding (Panteghini 2001, Niemann and Sureth 2004, Gries, Prior and Sureth 2012.…”

Section: Introductionmentioning

confidence: 56%

Tax Loss Offset Restrictions and Biased Perception of Risky Investments

Mehrmann

Sureth-Sloane

2017

SSRN Journal

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Abstract:We investigate how tax loss offset restrictions affect an investor's evaluation of risky investments under bounded rationality. We analytically identify behavioral tax effects for different levels of loss offset restrictions, tax rate and prospect theoretical biases (loss aversion, probability weighting and reference dependence) and find tax loss offset restrictions significantly bias investor perception, even more heavily than the tax rate. If loss offset restrictions are rather generous, investors are very loss averse or assign a huge weight to loss probabilities, taxation is likely to increase the preference value of risky investments (behavioral tax paradox). Surprisingly, the identified significant perception biases of tax loss offset restrictions occur under both high and low tax rates and thus are relatively insensitive to tax rate changes. Finally, we identify huge differences in behavioral tax effects across countries indicating that tax loss offset restrictions crucially determine the perceived tax quality of a country for risky investments. Our analysis is relevant for policy makers discussing future tax reforms as well as for investors assessing risky investment opportunities.

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Section: Introductionmentioning

confidence: 56%

Tax Loss Offset Restrictions and Biased Perception of Risky Investments

Mehrmann

Sureth-Sloane

2017

SSRN Journal

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“…Until now, the existing real option-oriented analyses that derive investment rules for risky investment projects with entry option and that account for tax effects have been rather limited (e.g., Agliardi (2001); Panteghini (2001Panteghini ( , 2004Panteghini ( , 2005; Niemann and Sureth (2004); Alvarez and Koskela (2008)). Under specific assumptions in this context it has been possible to identify tax systems that are neutral with respect to investment decisions and may serve as a yardstick for measuring tax effects under uncertainty.…”

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confidence: 99%

The Impact of Profit Taxation on Capitalized Investment with Options to Delay and Divest

Schneider

Sureth

2010

SSRN Journal

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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. Terms of use: Documents in AbstractIn entrepreneurial decisions making uncertain future profits often are a main characteristics of real investment opportunities. If investors can react to uncertainty the degree of irreversibility and timing flexibility inherent in the available project should be integrated into the decision calculus. In this paper we investigate the interdependencies of effects from profit taxation and real options. We model an investment decision including an option to invest and an option to abandon. We show that increasing the tax rate can lead to paradoxical tax effects, i.e. may foster an investor's willingness to invest into a capitalized investment. Instead, if we abstract from the possibility to abandon the investment object such paradoxical effect cannot be identified. Determining the after-tax value of the option to enter the investment project with and without an abandonment option we receive a critical cash flow cutoff level. We find that the value of the option to abandon depends on the tax rate and the amount of periodical cash flows. The option value can be increasing or decreasing in the tax rate. We find scenarios with paradoxical tax effects and show that the observed paradoxical effects are due to the presence of the real abandonment option itself. This finding contributes to the stream of literature that explains potential sources of paradoxical tax effects. The generated decision rules are helpful for investors facing risky investment opportunities and for discussing the economic impact of tax reforms. Furthermore, we highlight the overwhelming importance of integrating taxes in typically applied valuation approaches.

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“…Dixit/Pindyck (1994); Trigeorgis (1996). 4 E.g., Harchaoui/Lasserre (1996); Jou (2000); Pennings (2000); Agliardi (2001); Panteghini (2001Panteghini ( , 2004, Niemann/Sureth (2004), Schneider, Dirk (2005). 1 systems and tax reforms is an on-going process 5 it is important to understand the e¤ects of tax rate changes on investment decisions as well as distortions which might occur.…”

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confidence: 99%

Taxation of Risky Investment and Paradoxical Investor Behavior

2007

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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. Terms of use: Documents in AbstractUnder uncertainty and irreversibility, real option-based models are widely accepted for assessing investment projects. So far the existing post-tax analyses do not provide a general analytical description of investor reactions towards pro…t tax rate changes. This paper sets out to …ll part of the void. We implement a simple tax system and focus on risky capital market investment and an option to wait. Taxes a¤ect risk-free and risky capital market investment asymmetrically and hence cause distortions. We analytically identify a set of neutral tax rates (tax regimes) that preserve the critical post-tax investment threshold in case of tax rate changes as well as general normal and paradoxical settings. Unlike for other tax paradoxa neither depreciation rules nor loss o¤set restrictions are responsible for the observed paradoxical reaction. Identifying normal and paradoxical tax regimes can be regarded as a …rst step to a generalized description of tax e¤ects under uncertainty, both for individual project evaluation as well as for understanding tax e¤ects on an aggregate level.JEL classi…cation: H25; H21

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Tax neutrality under irreversibility and risk aversion

Cited by 16 publications

References 0 publications

Tax Loss Offset Restrictions and Biased Perception of Risky Investments

Tax Loss Offset Restrictions and Biased Perception of Risky Investments

The Impact of Profit Taxation on Capitalized Investment with Options to Delay and Divest

Taxation of Risky Investment and Paradoxical Investor Behavior

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