Preferential corporate income tax treatment: Valuation in the market portfolio

In the setting of the market portfolio, the impacts of preferential corporate income tax treatments through the valuational reduction for risk are opposite to and offset the impacts through the expected proceeds. This suggests that focusing on the absolute valuation of tax‐favored firms results in t...

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Bibliographic Details
Published in:International journal of economic theory 2023-09, Vol.19 (3), p.450-470
Main Author: Yoo, Junwook
Format: Article
Language:English
Subjects:
aversion to risk
capital income tax
Companies
corporate income tax
firm valuation
implicit tax
Income taxes
Return on investment
Risk reduction
tax favor
Taxation
Valuation
valuational reduction for risk
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Summary:In the setting of the market portfolio, the impacts of preferential corporate income tax treatments through the valuational reduction for risk are opposite to and offset the impacts through the expected proceeds. This suggests that focusing on the absolute valuation of tax‐favored firms results in the undermeasurement of implicit taxes on returns on investments in tax‐favored firms and the relative valuation with reference to fully taxed (i.e., tax‐disfavored) benchmark firms be used. In addition, corporate income taxes imposed on entities and capital income taxes imposed on investors have opposite valuational effects through the endogenously derived market‐aggregate aversion to risk.
ISSN:1742-7355
1742-7363
DOI:10.1111/ijet.12361