Taxation of Risky Investment and Paradoxical Investor Behavior

Analysis of investment decisions under uncertainty does not provide a general analytical description of investor reactions towards pro…t tax rate changes. We use a real option model and …nd distorting tax treatment of risk-free and risky investment. We analytically identify general paradoxical settings and furthermore, a whole set of neutral tax rates (tax regimes) in case of tax rate changes. Unlike for other tax paradoxa neither depreciation rules nor loss oset restrictions are responsible for the paradoxical reaction. The implied ambiguity of tax eects under uncertainty, aects individual project evaluation and understanding of tax eects on aggregate.