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Progressive Taxation, Tax Exemption, and Irreversible Investment under Uncertainty
Author(s) -
ALVAREZ LUIS H. R.,
KOSKELA ERKKI
Publication year - 2008
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2008.00356.x
Subject(s) - economics , monetary economics , sunk costs , volatility (finance) , tax exemption , investment (military) , tax rate , microeconomics , tax credit , econometrics , public economics , politics , political science , law
We analyze the impact of progressive taxation on irreversible investment under uncertainty. We show that if tax exemption is lower than sunk cost, higher tax rate will decelerate optimal investment by increasing the optimal investment threshold, while if tax exemption exceeds sunk cost, three different regimes arise. For “small” volatilities the optimal investment threshold is a positive function of volatility, but independent of tax rate. For “medium” volatilities it is independent of both tax rate and volatility. Finally, for “high” volatilities the optimal investment threshold depends positively on volatility, but negatively on tax rate so that we have “tax paradox”.