2 research outputs found
Tax Loss Offset Restrictions and Biased Perception of Risky Investments
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.Series: WU International Taxation Research Paper Serie
Asymmetric Taxation of Profits and Losses and its Influence on Investment Timing: Paradoxical Effects of Tax Increases
Applying a time-discrete investment model and a setting with an entry and an exit option and cash flow uncertainty we present a dynamic analysis of the impact of various loss offset regimes on risky investment timing decisions. We find that a tax system with loss offset restrictions will not distort timing decisions if the investor can exit the project. By contrast, in a setting without exit flexibility a tax discrimination against losses can cause paradoxical effects. In that respect, we analytically identify conditions for higher taxes to increase investors' propensity to choose early investment and hence accelerate entrepreneurial investment