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Taxes, Corporate Financial Policy and Investment Decisions in Australia

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  • MATT BENGE

Abstract

This paper presents a formal model of an optimizing firm to examine incentives provided by Australia's full imputation scheme in combination with its capital gains tax provisions. It explores how the tax system affects optimal dividend and financial policy. It derives an expression for the cost of capital for corporate investment which takes account of the way in which corporate tax payments influence firms' ability to pay franked dividends and examines how this is affected by capital gains taxation.

Suggested Citation

  • Matt Benge, 1997. "Taxes, Corporate Financial Policy and Investment Decisions in Australia," The Economic Record, The Economic Society of Australia, vol. 73(220), pages 1-15, March.
    • Handle: RePEc:bla:ecorec:v:73:y:1997:i:220:p:1-15
    DOI: 10.1111/j.1475-4932.1997.tb00974.x
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    References listed on IDEAS

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    1. Mervyn A. King, 1974. "Taxation and the Cost of Capital," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(1), pages 21-35.
    2. Mervyn A. King & Don Fullerton, 1984. "The United Kingdom," NBER Chapters, in: The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany, pages 31-86, National Bureau of Economic Research, Inc.
    3. Mervyn A. King & Don Fullerton, 1984. "The United States," NBER Chapters, in: The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany, pages 193-267, National Bureau of Economic Research, Inc.
    4. Alan J. Auerbach, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(3), pages 433-446.
    5. Colin Mayer, 1986. "Corporation Tax, Finance and the Cost of Capital," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(1), pages 93-112.
    6. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, vol. 2(1), pages 1-34, February.
    7. Mervyn A. King & Don Fullerton, 1984. "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany," NBER Books, National Bureau of Economic Research, Inc, number king84-1.
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    Cited by:

    1. J. Freebairn, 1997. "1997 Shann Memorial Lecture: Options & Prospects for Taxation Reform," Economics Discussion / Working Papers 97-20, The University of Western Australia, Department of Economics.
    2. Richard Fabling & Norman Gemmell & Richard Kneller & Lynda Sanderson, 2013. "Estimating Firm-Level Effective Marginal Tax Rates and the User Cost of Capital in New Zealand," Working Papers 13_14, Motu Economic and Public Policy Research.
    3. John Creedy & Norman Gemmell, 2015. "Taxation and the User Cost of Capital: An Introduction," Treasury Working Paper Series 15/02, New Zealand Treasury.
    4. John Freebairn, 1997. "Options and Prospects for Taxation Reform," The Economic Record, The Economic Society of Australia, vol. 73(223), pages 373-386, December.
    5. Marian Leimbach & Ottmar Edenhofer, 2005. "Capital Mobility and spillovers within a modular approach to multiregion modeling," Computing in Economics and Finance 2005 135, Society for Computational Economics.
    6. Kemfert, Claudia & Kremers, Hans, 2003. "A Computable General Equilibrium Assessment of a Developing Country Joining an Annex 1 Permit Trading Market," Conference papers 331095, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    7. Fabling, Richard & Gemmell, Norman & Kneller, Richard & Sanderson, Lynda, 2013. "Estimating Firm-Level Effective Tax Rates and the User Cost of Capital in New Zealand," Working Paper Series 2854, Victoria University of Wellington, Chair in Public Finance.
    8. John C. Handley & Krishnan Maheswaran, 2008. "A Measure of the Efficacy of the Australian Imputation Tax System," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 82-94, March.
    9. R. Lahiri, 1997. "Liquidity Effects and Optimal Monetary Policy in a Variable Time Preference Framework," Economics Discussion / Working Papers 97-21, The University of Western Australia, Department of Economics.
    10. Matt Benge, 1998. "Depreciation Provisions and Investment Incentives under Full Imputation," The Economic Record, The Economic Society of Australia, vol. 74(227), pages 329-345, December.
    11. Peter Dunn & Scott Francis & Jason Hall, 2009. "Leveraged superannuation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(3), pages 505-529, September.
    12. Ashley Winston, 2001. "Developing a Cost of Capital Module for Computable General Equilibrium Modelling," Centre of Policy Studies/IMPACT Centre Working Papers op-96, Victoria University, Centre of Policy Studies/IMPACT Centre.
    13. Fabling, Richard & Gemmell, Norman & Kneller, Richard & Sanderson, Lynda, 2013. "Estimating Firm-Level Effective Tax Rates and the User Cost of Capital in New Zealand," Working Paper Series 18787, Victoria University of Wellington, Chair in Public Finance.
    14. John Creedy & Norman Gemmell, 2015. "Taxation and the User Cost of Capital: An Introduction," Treasury Working Paper Series 15/02, New Zealand Treasury.

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