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On the Bias of the Corporate Tax against High-Risk Projects

Published online by Cambridge University Press:  06 April 2009

Hal Heaton
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Abstract

This paper demonstrates that the impact of the existing tax law is not uniform across projects with different variances of payoffs. A bias exists against projects with greater uncertainty of payoffs, which leads to an underinvestment in high risk projects. The bias against higher variance projects offers a theoretical justification for such tax incentives as the research and development tax credit.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 22 , Issue 3 , September 1987 , pp. 365 - 371
Copyright
Copyright © School of Business Administration, University of Washington 1987

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References

[1]Economic Recovery Tax Act of 1981: Law and Explanations. Chicago, IL: Commerce Clearing House (1981).Google Scholar
[2]Merton, R. C. “Theory of Rational Option Pricing.’ Bell Journal of Economics and Management Science, 4 (Spring 1973), 141–183.Google Scholar
[3]Statistics of Income: Corporation Income Tax Returns. Washington, D.C.: Dept. of the Treasury.Google Scholar