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Finance and Credit
 

Possibilities to increase taxes and maintain favorable investment climate in the country

Vol. 20, Iss. 45, DECEMBER 2014

Available online: 1 December 2014

Subject Heading: Investment potential

JEL Classification: 

Pages: 2-17

Brusov P.N. Financial University under Government of Russian Federation, Moscow, Russian Federation
pnb1983@yahoo.com

Filatova T.V. Financial University under Government of Russian Federation, Moscow, Russian Federation
mfilatova@fa.ru

Orekhova N.P. Institute of Management, Business and Law, Rostov-on-Don, Russian Federation
Natali_Orehova@Bk.Ru

Goncharenko L.I. Financial University under Government of Russian Federation, Moscow, Russian Federation
goncharenko@yandex.ru

Anisimov S.A. Financial University under Government of Russian Federation, Moscow, Russian Federation
sa164@yandex.ru

Rudomanenko V.P. Financial University under Government of Russian Federation, Moscow, Russian Federation
rudoman1993@gmail.com

Importance In the present economic conditions (economic stagnation, sanctions of the West) the State mobilizes all possible resources to stabilize economic situation in the country (income tax rate increase, increase in the retirement age, etc.). The article addresses one of the aspects of possible mobilization of resources, i.e. an increase in income tax rates. This topic has always been important, and in the current circumstances its relevance has increased dramatically.
     Objectives The study deals with the aspects of possible resource mobilization, i.e. an increase in income tax rates. We are planning a series of articles about impact of taxation on the country's economy. In these articles we intend to cover two global themes, i.e. effects of taxation on production and investment efficiency.
     Methods We conducted the study of the effects of taxation on long-term investment efficiency within the framework of investment models created by P. Brusov, T. Filatova, and N. Orekhova.
     Results An increase in income tax rate results in reduction of the net present value of a project on the one hand, and in decreased sensitivity of an investment project's efficiency to the leverage level on the other hand. At high leverage levels, the effect of income tax rate growth on the efficiency of investment projects reduces significantly. It is possible to differentiate taxation depending on the level of borrowed funds in investment projects of a company: to apply increased income tax rate to projects with high leverage. We have demonstrated a possibility to obtain quantitative estimates for projects with different cost of equity capital and debt capital in the event of a free structure of invested capital. The effect of taxation on investment program efficiency depends on the level of leverage, project duration, cost of own funds, the level of return on investment and methods of building the invested capital.
     Conclusions and Relevance We conclude that the effect of taxation significantly depends on the level of debt financing of investment projects of companies, and decreases if leverage level is growing. The regulating authority should take into account the obtained results when setting income tax rates.

Keywords: taxing, effectiveness, investment project, leverage level

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