[...]... an individuals marginal tax rate on self-employment income, while leaving his marginal wage tax rate unchanged, reduces the probability of entering the business sector Gordon (1998) focused on tax avoiding practices He maintained that setting up new rms can avoid taxation by reclassifying their earnings as corporate rather than personal income, as long as the former is taxed less heavily than the latter... value of the investment project Under some circumstances, however, he found a tax paradox: increasing the corporate income tax rate can stimulate investment by lowering the option value of the project.7 In two interesting papers, Alvarez and Kanniainen (1997, 1998) analyzed the Johansson-Samuelson Theorem8 in a real-option setting They showed that as long as taxation leaves the projects value unchanged... approach see also Pennings (2000) Johansson-Samuelson Theorem is the joint result of Johanssons (1969) and Samuelsons (1964) articles on comprehensive income taxation Assuming that all kinds of capital are subject to the same marginal tax rate, they nd that the value of an investment project is una ected by taxation on condition that scal depreciation allowances coincide with economic depreciation and... Niemann (1999), and Panteghini (200 1a) 1.4 An emerging literature 13 1.4 An emerging literature Since the beginning of the 1990s, tax economists have studied the interactions between, on the one hand, irreversibility, uncertainty and investment timing, and, on the other hand, corporate taxation A pioneering article is that of MacKie-Mason (1990), who showed that an asymmetric corporation tax always... another additional channel through which increased uncertainty a ects the current level of investment: For given costs of acquiring information, an increase in uncertainty about the relevant parameters makes it protable to spend more time and resources in acquiring information before making a particular investment decision This element is particularly important when there are a range of possible investment... showed that tax avoiding practices may favor entrepreneurial activity More recently, Lee and Gordon (2005) have used cross-country macro data during the 1970-1997 period and have found that a cut in the statutory tax rate by 10 percentage points raises the annual growth rate by more than one percentage point Their explanation is that, given the personal tax rate, a more favorable treatment of risky activities... ranking in a before-tax and in an after-tax protability analysis In other words, (1.12) implies that the after-tax threshold point is equal to the laissez-faire one of equation (1.7) The neutrality result can be explained as follows On the one hand, an increase in the tax rate reduces the present value of future discounted prots and induces the rm to delay investment On the other hand, the increase in. .. Multinational Company Net Present Value Petroleum Revenue Tax Return On Assets Single Business Tax Schanz-Haig-Simons Simplied Income Tax Smooth Pasting Condition Value Added Tax Venture Capital Value Matching Condition Part I Basic issues 1 The real option approach A rms activity is usually characterized by exibility, as business strategies are very seldom based on commitment to a determined static... describing the life-cycle of a rm, with both a start-up and an expansion phase Quite realistically, in the former stage the rm is assumed to be non -corporate In the latter one, however, the entrepreneur can exercise an option to incorporate As they show, personal taxation has an ambiguous e ect On the one hand, the cost of capital in the start-up stage is raised by dividend taxation On the other hand, capital... entrepreneurial choice by an individual who initially works and has an opportunity to start a new business activity Here we concentrate on the start-up decision and assume that the rm starts non -corporate For simplicity we disregard personal taxation and assume that the individual is innitely-lived.3 Moreover we introduce the following: Assumption 1 At time = 0 the individual is a worker, earning an exogenous . class="bi x0 y0 w1 h0" alt="" Corporate Taxation in a Dynamic World Paolo M. Panteghini Corporate Taxation in a Dynamic World With 6 Figures and 6 Tables 123 Professor. are increasingly widespread. As found for instance by Graham and Harv ey (2001) more than 25% of US companies sur- veyed always or almost always incorporate