Innovation and Taxes: A Financial Analysis ofFiscal Impacts on Investments in ElectronicMarkets and New Products
Markets are undergoing a fundamental shift towards the end of the second millenium: inmany business branches the traditional market forms are supplemented - and in some of thembeing replaced in the long run - by new information age forms of business. Firms wanting tomeet this challenge are forced to make large investments to establish business in these newmarkets, only to find themselves later in competition stronger than ever seen before. This"hyper"competition may lead to a too fast rate of innovation causing a social welfare loss.Concentrating on two measures, namely the tax rate and terms of depreciation, in this paperwe analyze how a government’s fiscal policy influences investment decisions in new marketsand new products. While in closed economies a government may be able to adjust the rate ofinnovation to the social welfare optimum, doing the same for industries acting on globalmarkets will make domestic companies being losers in global competition. The financialanalysis yields a number of results for the investor and the government, e.g. that foraccelerating innovation cutting down taxes is strictly dominated by improved terms ofdepreciation. A low-tax-rate-policy instead of good terms of depreciation may well have - onthe contrary - a devastating effect on innovation and investments in new markets and newproducts...
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