IDEAS home Printed from https://ideas.repec.org/p/ags/pugtwp/331289.html
   My bibliography  Save this paper

Corporate Taxation, Corporate Finance and Investment: Theory and Applications in Dynamic CGE Modelling

Author

Listed:
  • Winston, Ashley

Abstract

Dynamic computable general equilibrium (CGE) models, such as the MONASH model developed at the Centre of Policy Studies, typically use complex dynamic investment mechanisms to generate dynamic growth paths. Even so, these models don’t account for corporate finance and corporate taxation in determining investment outcomes. This paper provides final results from a work program aimed at imposing corporate finance and corporate taxation on investor choices in an inter-temporal model of investment, and then describes the process of modifying the MONASH model to take on-board this new theory. The paper will proceed in two parts. Firstly, we briefly outline the development of an investment model that links corporate taxation and corporate finance to investment behaviour. Firms seek to maximise shareholder wealth, and firm and investor optimising-behaviour leads to a set of rate-of-return expressions that are determined by financing and investment policies, both of which, themselves, are the result of optimising decisions. Firms in this model optimise across two dimensions – they optimise the present value of shareholder distributions across time (i.e. dynamic optimisation), which they achieve by determining an optimal choice of inputs (including an investment policy) and an optimal method of financing these inputs (involving an optimal financial policy and dividend policy). The solution to the firm’s optimal growth path takes account of: various company and personal income tax regimes; various capital-gains taxes regimes (including realisation-basis capital gains taxation); depreciation allowances; investment allowances; debt accumulation; transactions costs on external financing; and interest rates on debt linked to financial leverage. The resulting rate-of-return expressions highlight the complex nature of the taxation of capital income and the ways in which taxation reform can influence investment behaviour. Secondly, we explain the implementation of this investment approach in MONASH, and report on a series of simulations. A key feature of the model in application is that firms choose their financial and dividend policies endogenously, in every period of the simulation, from eight potential alternatives. The impact of two different tax reforms are simulated using a version of MONASH-Australia aggregated to 32 industries and 33 commodities. The two experiments are: (1) a cut to the dividend-tax rate, such as that currently under debate in the US; and, (2), a cut in a realisation-basis capital gains tax. Each experiment is run twice, with recursive/backward-looking expectations and rational/forward-looking expectations imposed. The simulations show that a GE approach is necessary to gain full insight into the investment behaviour of corporations, as these tax cuts have two immediate and contradictory effects - the tax cuts reduce the taxation of capital income, increasing the rate of return, while also increasing the cost of finance and the user-cost of capital, thereby decreasing the rate of return. Furthermore, we find that anticipation effects are important in the determination of firm behaviour and investment outcomes. A comparison of these results highlights the ways in which different capital-income tax regimes influence firm behaviour and outcomes in a dynamic setting, including the different adjustment paths that result.

Suggested Citation

  • Winston, Ashley, 2004. "Corporate Taxation, Corporate Finance and Investment: Theory and Applications in Dynamic CGE Modelling," Conference papers 331289, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
  • Handle: RePEc:ags:pugtwp:331289
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/331289/files/1764.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:bla:revinw:v:23:y:1977:i:4:p:339-64 is not listed on IDEAS
    2. Graham Pyatt & Jeffrey I. Round, 1977. "Social Accounting Matrices For Development Planning1," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 23(4), pages 339-364, December.
    3. Hertel, Thomas, 1997. "Global Trade Analysis: Modeling and applications," GTAP Books, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, number 7685, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Candau, Fabien & Fontagne, Lionel & Jean, Sébastien, 2004. "The utilisation rate of preferences in the EU," Conference papers 331286, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    2. Bchir, Mohamed Hedi & Fouquin, Michel, 2005. "Comparing Bilateral and Multilateral ASEAN-10+4 Free Trade Agreements Possible Impacts on Member and Non-member countries," Conference papers 331401, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. Simon J.Evenett & Mia Mikic & Ravi Ratnayake (ed.), 2011. "Trade-led growth: A sound strategy for Asia," ARTNeT Books and Research Reports, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), number brr10.
    4. Ianchovichina, Elena, 2004. "Trade policy analysis in the presence of duty drawbacks," Journal of Policy Modeling, Elsevier, vol. 26(3), pages 353-371, April.
    5. Pierre Boulanger & Hasan Dudu & Emanuele Ferrari & George Philippidis, 2016. "Russian Roulette at the Trade Table: A Specific Factors CGE Analysis of an Agri-food Import Ban," Journal of Agricultural Economics, Wiley Blackwell, vol. 67(2), pages 272-291, June.
    6. Jiang, Tingsong, 2003. "The Impact of China's WTO Accession on its Regional Economies," Australasian Agribusiness Review, University of Melbourne, Department of Agriculture and Food Systems, vol. 11.
    7. Henseler, Martin & Piot-Lepetit, Isabelle & Ferrari, Emanuele & Mellado, Aida Gonzalez & Banse, Martin & Grethe, Harald & Parisi, Claudia & Hélaine, Sophie, 2013. "On the asynchronous approvals of GM crops: Potential market impacts of a trade disruption of EU soy imports," Food Policy, Elsevier, vol. 41(C), pages 166-176.
    8. Adams, Philip D., 2008. "Insurance against Catastrophic Climate Change: How Much Will an Emissions Trading Scheme Cost Australia?," Conference papers 331770, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    9. Kym Anderson, 2005. "On the Virtues of Multilateral Trade Negotiations," The Economic Record, The Economic Society of Australia, vol. 81(255), pages 414-438, December.
    10. Pavel Ciaian & d'Artis Kancs & Jan Pokrivcak, 2008. "Comparative Advantages, Transaction Costs and Factor Content of Agricultural Trade: Empirical Evidence from the CEE," EERI Research Paper Series EERI_RP_2008_03, Economics and Econometrics Research Institute (EERI), Brussels.
    11. Kym Anderson & Anna Strutt, 2012. "Agriculture and Food Security in Asia by 2030," Macroeconomics Working Papers 23309, East Asian Bureau of Economic Research.
    12. Dhoubhadel, Sunil P. & Taheripour, Farzad & Stockton, Mathew C., 2016. "Livestock Demand, Global Land Use, and Induced Greenhouse Gas Emissions," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235271, Agricultural and Applied Economics Association.
    13. Federico Perali & Stefania Lovo, 2009. "Counterfactual analysis using a regional dynamic general equilibrium model with historical calibration," Working Papers 58/2009, University of Verona, Department of Economics.
    14. Mai, Yinhua, 2008. "Removing border protection on wheat and rice: effects on rural income and food self-sufficiency in China," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(2), pages 1-19.
    15. Lucian Cernat & Sam Laird & Alessandro Turrini, 2003. "How Important are Market Access Issues for Developing Countries in the Doha Agenda?," International Trade 0302004, University Library of Munich, Germany.
    16. Palatnik, Ruslana R. & Kan, Iddo & Rapaport-Rom, Mickey & Ghermandi, Andrea & Eboli, Fabio & Shechter, Mordechai, 2011. "Land transformation analysis and application," Conference papers 332155, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    17. Hareau, Guy Gaston & Norton, George W. & Mills, Bradford F. & Peterson, Everett B., 2004. "Potential Benefits Of Transgenic Rice In Asia: A General Equilibrium Approach," 2004 Annual meeting, August 1-4, Denver, CO 20334, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    18. Lee, Hiro & van der Mensbrugghe, Dominique, 2005. "The impact of the US safeguard measures on Northeast Asian producers: General equilibrium assessments," MPRA Paper 82288, University Library of Munich, Germany.
    19. Lips, Markus & Rieder, Peter, 2002. "Endogenous adjusted Output Quotas - The Abolishment of the Raw Milk Quota in the European Union," Conference papers 330980, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    20. Dixon, Peter & Rimmer, Maureen, 2021. "A GTAP Historical Simulation from 2004 to 2014," Conference papers 333258, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:pugtwp:331289. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/gtpurus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.