67. "Damn the formatting took away my math. Here's my work if curious" In response to In response to 58
I can come up with a simple exercise that can show taxes can affect investment decisions.
Say we play a coin flip game: You have to invest 1 dollar to play. If it lands on heads you get $1.50, if it lands on tails you lose your 1 dollar.
In a world with no taxes, you would most definitely play this risky game since the expected outcome is that you profit $0.25: {(0.5 x 1.50) + (0.5 x -1) = $0.25}. Invest a dollar and you are expected to go home with $1.25.
But let's say there is a 25% tax on winnings. Will your decision to invest change? Maybe. Now your expected profit is $0.06. {(0.5 x 1.50(1-.25)) + (0.5 x -1) = $0.06}. Invest a dollar and you are expected to go home with $1.06. Not as attractive as an investment.
What if the tax rate increased to 40%? Your expected profit is now -$0.05. {(0.5 x 1.50(1-.40)) + (0.5 x -1) = -$0.05}. A loss. Invest a dollar and you are expected to go home with $0.95. Now a bad investment.
So yes, taxes can affect investment decisions. Especially if they are risky.