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Asymmetric Taxation of Gains and Losses and the Willingness to Invest
Caren Sureth,
University of Paderborn
Armin Voss, University of Magdeburg
ABSTRACT. Asymmetric taxation of profits and losses and dividends and capital gains may invoke distortions. Therefore, it is important to find out whether there are tax schedules that induce less distortion than others. We analyze the impact of asymmetric taxation on the willingness to invest into an investment project with uncertain cash flow. Applying an option pricing framework we model the option to defer an investment decision and derive tax rate combinations that do not influence the extent of postponement. We show that capital gains taxation often reduces an investor’s willingness to invest, whereas asymmetric tax treatment of profits and losses may compensate this effect at least partially. We identify indifferent curves that describe tax schedules providing constant willingness to invest. Our results provide important information for asset pricing in merger and acquisition processes. We highlight overwhelming importance of integrating taxes in typically applied valuation approaches.
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