Di Corato, Luca
- Department of Economics, Swedish University of Agricultural Sciences
Abstract
This paper examines the net benefit accruing to a present-biased government contemplating the option of speeding up investment setting a lower tax rate on future profits or an investment subsidy as an incentive. The literature generally suggests the use of an investment subsidy rather than a reduced tax rate. However, this study shows that, depending on the degree of present-biasedness, it may be more advantageous for the government to set a lower tax rate. The government, in fact, when selecting the instrument to be used for speeding up investment, trades off the immediate and certain cost of a subsidy against the random tax revenues accruing from the investment. Hence, from the short-sighted perspective of current government, a lower tax rate may appear optimal as long as the consideration given to the earnings of future governments is small and/or the current government's duration is short.
Keywords
Investment; Real options; Quasi-hyperbolic discounting; Tax reduction; Investment subsidy
Published in
Journal of Economics
2016, volume: 119, number: 2, pages: 101-111
Publisher: SPRINGER WIEN
SLU Authors
UKÄ Subject classification
Economics
Publication identifier
- DOI: https://doi.org/10.1007/s00712-016-0494-4
Permanent link to this page (URI)
https://res.slu.se/id/publ/78021