IDEAS home Printed from https://ideas.repec.org/p/cop/wpaper/op-96.html
   My bibliography  Save this paper

Developing a Cost of Capital Module for Computable General Equilibrium Modelling

Author

Listed:
  • Ashley Winston

Abstract

This paper outlines two potential approaches to incorporating business taxation and allowances into a model of a firm to determine the effect of tax policy changes on the firm's behaviour. Following Auerbach, King and Benge, we first develop a model in which the firm maximises the value of its shareholder equity, taking account of: company and personal income taxes; capital-gains taxes (including a treatment of realisation-based capital-gains tax); depreciation allowances; investment allowances; and interest rates on debt linked to financial leverage. This approach takes the revenue streams and income payments generated by the firm as given. The second approach involves deriving a function for the user-cost of capital to the firm in an optimising framework in which the expression for the value of the firm is the objective function, and then solve for all of the firm's choice variables. In this way, the model determines the firm's optimal investment policy and the resulting levels of revenues and income streams to shareholders. By embedding this in a dynamic CGE model, we can simulate the effects of tax changes on the user-cost of capital and thus on investment. Our ultimate aim is to enable an analysis of the effects of reforms to business taxation (such as the recent Ralph proposals) using a large-scale dynamic CGE model. This is a revised version of a paper prepared for the PhD Conference in Economics and Business held at The University of Western Australia, Perth, Australia, November 7-9 2001.

Suggested Citation

  • 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.
  • Handle: RePEc:cop:wpaper:op-96
    as

    Download full text from publisher

    File URL: https://www.copsmodels.com/ftp/workpapr/op-96.pdf
    File Function: Initial version, 2001-12
    Download Restriction: no

    File URL: https://www.copsmodels.com/elecpapr/op-96.htm
    File Function: Local abstract: may link to additional material.
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Benge, M., 1999. "Gains to Australian Shareholders from Perturbations in Corporate Financial Policy," Papers 369, Australian National University - Department of Economics.
    2. 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.
    3. Benge, M., 1999. "Gains to Australian Shareholders from Perturbations in Corporate Financial Policy," ANU Working Papers in Economics and Econometrics 1999-369, Australian National University, College of Business and Economics, School of Economics.
    4. 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.
    5. Smith, Vernon L, 1972. "Default Risk, Scale, and the Homemade Leverage Theorem," American Economic Review, American Economic Association, vol. 62(1), pages 66-76, March.
    6. 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.
    7. John Head, 1997. "Company Tax Structure and Company Tax Incidence," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(1), pages 61-100, January.
    8. repec:bla:ecorec:v:74:y:1998:i:227:p:329-45 is not listed on IDEAS
    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. Leimbach, Marian & Edenhofer, Ottmar, 2005. "Capital mobility and spillovers within a modular approach to multi-region modeling," Conference papers 331342, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    2. 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.
    3. Creedy, John & Gemmell, Norman, 2015. "Taxation and the User Cost of Capital : An Introduction," Working Paper Series 19269, Victoria University of Wellington, Chair in Public Finance.
    4. 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.
    5. 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.
    6. Benge, M., 1999. "The Ralph Report Depreciation Proposals and Investment Neutrality," ANU Working Papers in Economics and Econometrics 1999-371, Australian National University, College of Business and Economics, School of Economics.
    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 18787, 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. 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.
    10. John Creedy & Norman Gemmell, 2015. "Taxation and the User Cost of Capital: An Introduction," Treasury Working Paper Series 15/02, New Zealand Treasury.
    11. Andreas Fagereng & Luigi Guiso & Davide Malacrino & Luigi Pistaferri, 2020. "Heterogeneity and Persistence in Returns to Wealth," Econometrica, Econometric Society, vol. 88(1), pages 115-170, January.
    12. Tryphon Kollintzas, 1986. "Tax Policy under Nongeometric Physical Depreciation," Public Finance Review, , vol. 14(3), pages 263-288, July.
    13. Mr. Shafik Hebous & Andualem Mengistu, 2024. "Efficient Economic Rent Taxation under a Global Minimum Corporate Tax," IMF Working Papers 2024/057, International Monetary Fund.
    14. Bustos, Alvaro & Engel, Eduardo M. R. A. & Galetovic, Alexander, 2004. "Could higher taxes increase the long-run demand for capital? Theory and evidence for Chile," Journal of Development Economics, Elsevier, vol. 73(2), pages 675-697, April.
    15. Schneider, Georg & Sureth, Caren, 2010. "The impact of profit taxation on capitalized investment with options to delay and divest," arqus Discussion Papers in Quantitative Tax Research 97, arqus - Arbeitskreis Quantitative Steuerlehre.
    16. Nippel, Peter, 2006. "Capital structure decisions under the German tax code," Manuskripte aus den Instituten für Betriebswirtschaftslehre der Universität Kiel 607, Christian-Albrechts-Universität zu Kiel, Institut für Betriebswirtschaftslehre.
    17. Mori, Naoya, 2010. "Tax clientele effects of dividends under intertemporal consumption choices," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1089-1097, May.
    18. Magnus Henrekson & Tino Sanandaji, 2011. "Entrepreneurship and the theory of taxation," Small Business Economics, Springer, vol. 37(2), pages 167-185, September.
    19. Sanjiva Prasad & Christopher J. Green & Victor Murinde, 2005. "Company Financial Structure: A Survey and Implications for Developing Economies," Chapters, in: Christopher J. Green & Colin Kirkpatrick & Victor Murinde (ed.), Finance and Development, chapter 12, Edward Elgar Publishing.
    20. Polito, Vito, 2011. "Deferred Taxation and Effective Tax Rates on Income from Capital in the United States, 2000-2010," Cardiff Economics Working Papers E2011/14, Cardiff University, Cardiff Business School, Economics Section.

    More about this item

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

    Statistics

    Access and download statistics

    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:cop:wpaper:op-96. 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: Mark Horridge (email available below). General contact details of provider: https://edirc.repec.org/data/cpmonau.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.