Capital Allowances are Tools used by Tax Authorities (Essay Sample)

Write a 2-PAGE essay on the topic ''Effect of taxes on corporate investment decisions'' using the APA FORMAT. Provide 3 REFERENCES.
Effect of taxes on corporate investment decisions
Corporate investment is concerned with how a business will optimally deploy capital to the existing opportunities to maximize profits and shareholder value. The tax regime in that jurisdiction will affect how the managers of a business will deploy the capital.
The higher the tax capital allowances in that tax regime, the more attractive it will be to make capital investments. Capital allowances are tools used by tax authorities that enable businesses to ‘‘write off the cost of an asset over a period of time’’ (‘‘What is tax depreciation/capital allowances? ’’, n.d., para. 1). If the capital allowance rate is high, the business will use a higher figure to reduce the taxable income reducing the total taxes paid. A lower tax bill will lead to a higher profit which will enable the business to reinvest more.
Lower corporation taxes in a jurisdiction will increase the overall corporate investment. This is because businesses will have higher net profits because of the tax savings and therefore have more funds to reinvest.
An increase in consumption taxes will lead to a decrease in corporate investment. Consumption taxes are generally passed on to the users but this might be hard when there is a high rate of competition in the industry or when demand is highly elastic (Jacob et al., 2016). This means that a big portion of the tax increase will be absorbed by the business leading to a decrease in profits. With reduced profits, the business will have to reduce its reinvestments.
A reduction in capital gains tax will lead to an increase in corporate investment (Moon, 2018). Capital gains taxes are usually applied to assets that have appreciated over a certain period. If the tax is high, businesses will generally shy away from reinvesting profits because a big portion of the anticipated gain will be eaten up by the tax. Instead of taking the extra risk by investing more, the business will be better off by paying dividends to its shareholders.