This paper demonstrates that the impact of the existing tax law is not uniform across projects with different variances of payoffs. A bias exists against projects with greater uncertainty of payoffs, which leads to an underinvestment in high risk projects. The bias against higher variance projects offers a theoretical justification for such tax incentives as the research and development tax credit.

It is shown that the existing tax law with its incomplete tax-loss offset will often lead to leasing contracts being advantageous to firms. This result obtains even if firms are in the same tax bracket and have the same probability of having positive taxable income.