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

    File URL: http://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. Mervyn A. King, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 21-35.
    2. 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.
    3. Benge, Matt, 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.
    4. Benge, Matt, 1998. "Depreciation Provisions and Investment Incentives under Full Imputation," The Economic Record, The Economic Society of Australia, vol. 74(227), pages 329-345, December.
    Full references (including those not matched with items on IDEAS)

    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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Horridge). General contact details of provider: http://edirc.repec.org/data/cpmonau.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.