Optimal Tax Depreciation in Stochastic Investment Model
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The paper proposes a model of tax stimulation for investing a creation of new industrial enterprises under uncertainty. The state which is interested in realization of a certain investment project uses accelerated depreciation mechanism in order to attract an investor. A behavior of a potential investor is assumed rational. It means that while looking at economic environment investor chooses such an investment moment that maximizes expected net present value which depends on depreciation policy. Specific features of the model are irreversibility of initial investment and stochastic flow of future enterprise’s profits. Authors find such a depreciation policy which maximizes expected tax payments from the project after investment. For actual depreciation methods (straight-line and declining-balance) it is obtained optimal depreciation rates which satisfy certain restrictions.
KeywordsInvestment under uncertainty income tax tax depreciation optimal depreciation
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