Investment In An Unstable Tax Environment

Abstract

While most of the capital budgeting situations are typically micro level problems, the introduction of this dual impact of the corporate tax rate on the project acceptance criterion provides an insight into potential tax regime decisions on long term investments in a given tax jurisdiction. If we understand this dual behavior well enough, it might be possible for a tax regime to manipulate its corporate tax rate without necessarily jeopardizing acceptability status of capital projects to providers of capital. The present paper is an attempt to model this dual impact of the corporate tax rate on the NPV of projects within the tax regime, and study the implications of the results for policy makers and for corporations facing such policy makers.