Working Paper Series, Department of Economics, Copenhagen Business School
Taxation and systematic risk under decreasing returns to scale
Abstract: Lund (2002a) showed in a CAPM-type model how tax
depreciation schedules affect required expected returns after taxes. Even
without leverage higher tax rates implied lower betas when tax deductions
were risk free. Here they are risky, and marginal investment is taxed
together with inframarginal in an analytical model of decreasing returns.
With imperfect loss offset tax claims are analogous to call options. The
beta of equity is still decreasing in the tax rate, but increasing in the
underlying volatility. The results are important if market data are used to
infer required expected returns, and in discussions of tax design.
Keywords: Corporate tax; depreciation; imperfect loss offset; decreasing returns; cost of capital; uncertainty; (follow links to similar papers)
JEL-Codes: F23; G31; H25; (follow links to similar papers)
50 pages, June 2, 2006
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