Tax Rate Uncertainty and Investment Behavior

This paper deals with the effects of tax rate uncertainty on risk-neutral and risk-averse investment behavior. We analyze effects of stochastic tax rates on both real and financial investment. It emerges that under risk neutrality as well as under risk aversion, increased tax rate uncertainty has an ambiguous impact on investment behavior, depending on the investor’s utility function and the investment project’s structure of cash flows and depreciation deductions. The popular view that tax policy uncertainty depresses real investment is rejected. Tax neutrality in the light of tax policy uncertainty is defined more precisely. Neutrality results for the Johansson-Samuelson tax and the cash flow tax can be widely confirmed for tax rate uncertainty.