What does it mean for a tax code to be convex? If a country's corporate tax rate is flat, does it make sense for a firm to hedge?

What will be an ideal response?

A convex tax code imposes a larger tax rate on higher incomes and a smaller tax rate on lower incomes. If a country's tax rate is flat, a key question is how losses are treated. If losses are subsidized immediately at the same rate that gains are taxed, there is no tax advantage to hedging. But, losses are usually not subsidized, as losses are typically only allowed to be deducted against future income. These tax-loss carry-forwards usually do not grow with the time value of money; nor are they indexed to inflation. Thus, the subsidy associated with a loss is less than the tax associated with a profit, and the tax code is effectively convex. There are also other legitimate reasons to hedge that are not tax related.