Effect of Taxes on Corporate Investment Decisions

Introduction

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