Effect of Taxes on Corporate Investment Decisions
According to Hassert and Hubbard (1976), taxation is the compulsory levy by the government on the income or consumption of various items. Alworth and Arachi (2001) defined corporate tax as tax levied on the profits of corporates. The corporate investment decision is the decision of the company to invest its profits in various long-term assets with an anticipation of future income flows. Taxes have various effects on corporate investment decisions.
Impacting the choice for investment projects
Corporates may decide to hold stock because they are not ready to pay capital gains taxes. Corporate investment professionals have to come up with criteria to reduce the amount of taxes they pay through capital gains taxation. They devise a matrix that will ensure the company is not overtaxed. The corporate may decide to venture into real estate investments to have a more tax-free way of increasing their income. They may also make a decision to take advantage of tax deferred to invest and earn more investment income.
Taxes reduce the amount of income that can be re-invested
Corporate taxes have a big impact on the amount of income that the company wishes to reinvest in various investment portfolios. The corporate has to consider various ways they invest the income remaining after taxation so that they can get an extra income. Corporate financial planners and investment analysts labor to devise ways the company can leverage on the remaining amount of income by advising investment in various ways.
Taxes reduce the amount of shareholders earnings
Corporate taxes reduces significantly the number of earnings by shareholders. The company is under obligation to pay its shareholders more especially those who ought to be paid regardless of the financial health of the company. The other types of shareholders are left with no option but to take what the directors announce.
Corporates are obligated to pay their taxes yearly which is taxed on their income. This reduces as explained above the amount of income available to be re-invested, the number of earnings by the shareholders, and impacts the decision on investment projects. These effects change the investment decisions made by corporates.
Alworth, J., & Arachi, G. (2001). The effect of taxes on corporate financing decisions: Evidence from a panel of Italian firms. International Tax and Public Finance, 8(4), 353-376.
Muhammad, Y. S. Effect Of Corporate Income Tax Rate On Investment Decisions Of Listed Deposit Money Banks In Nigeria. Comparative Study On The Effects Of Tax Audit On Value Added Tax (VAT) Compliance In, 45.