Taxation of Risky Investment and Paradoxical Investor Behavior

Analysis of investment decisions under uncertainty does not provide a general analytical description ofinvestor reactions towards profit tax rate changes. We use a real option model and find distorting taxtreatment of risk-free and risky investment. We analytically identify general paradoxical settings andfurthermore, a whole set of neutral tax rates (tax regimes) in case of tax rate changes. Unlike for othertax paradoxa neither depreciation rules nor loss offset restrictions are responsible for the paradoxicalreaction. The implied ambiguity of tax effects under uncertainty, a¤ects individual project evaluationand understanding of tax e¤ects on aggregate.