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Effect of Taxation on the Investment Decision in Firms - Research Paper Example

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The "Effect of Taxation on the Investment Decision in Firms" paper examines the effects of taxation on high-risk investment decisions. This paper explains the various aspects that need to be considered in high-risk decision making and then explains the effect of taxation on investment decisions…
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Effect of Taxation on the Investment Decision in Firms
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Download file to see previous pages Realistic tax policy in a developing country can ensure large availability of vital foreign funds and investments and therefore give a boost to the economy. The government dishes out sops to specific sectors and fulfills its task of generating enough growth in high-risk sectors. The investment decision of firms depends upon various factors like the political will and stability, the infrastructure and the tax regime. The taxes levied on corporate investments also have a direct bearing on the profitability of these firms; hence they become a vital factor while taking any investment decisions. This, therefore, makes tax rates an important instrument with governments who manipulate it to ensure the economic growth of a country.

This paper examines the effect of taxes on investment decisions of the firms. It explains the various factors that affect firms functioning in the high risk-taking sectors and the various instruments available with the government by which they can assist these firms to attain a better economic growth both for the firms and the country. In the end, a case study of the steps taken to promote investments in the European Union amplifies the points made in the paper.

The profits that a firm earns are directly affected by the rate of taxes that are levied on its produce. This has a bearing on its investment capacity. The poor infrastructure and institutional facilities combined with high tax rates can make any country a poor investment destination for firms. The tax system is an effective tool in the hands of the government to encourage those sectors which require investments of long gestational periods or poorly developed sectors where there is a need for capital investment. By altering the tax rates governments can shift the investments from more lucrative to high-risk sectors by giving cuts in corporate tax and accelerated depreciation so as to increase the post-tax profitability of the firm. ...Download file to see next pagesRead More
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