nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2006‒09‒03
three papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Valuation, leverage and the cost of capital in the case of depreciable assets By Lund, Diderik
  2. Taxation and systematic risk under decreasing returns to scale By Lund, Diderik
  3. Measuring Tax Efficiency By Raimondos-Møller, Pascalis; Woodland, Alan D.

  1. By: Lund, Diderik (Department of Economics, Copenhagen Business School)
    Abstract: Levy and Arditti (1973) introduced depreciable assets into the Modigliani and Miller (1958) model, and analyzed the implications for the cost of capital. Assuming that the firm reinvests indefinitely to maintain a constant expected cash flow, they found that depreciation increases the cost of capital before and after tax. Most of their assumptions are maintained. However, commitment to perpetual reinvestment is in most cases not a reasonable assumption. Without it, depreciation decreases the cost of capital before and after tax. The effect of depreciation is less in absolute value than in Levy and Arditti, but not insignificant.
    Keywords: Cost of capital; depreciation; corporate taxes
    JEL: G31 H25
    Date: 2006–08–22
  2. By: Lund, Diderik (Department of Economics, Copenhagen Business School)
    Abstract: Lund (2002a) showed in a CAPM-type model how tax depreciation schedules affect required expected returns after taxes. Even without leverage higher tax rates implied lower betas when tax deductions were risk free. Here they are risky, and marginal investment is taxed together with inframarginal in an analytical model of decreasing returns. With imperfect loss offset tax claims are analogous to call options. The beta of equity is still decreasing in the tax rate, but increasing in the underlying volatility. The results are important if market data are used to infer required expected returns, and in discussions of tax design.
    Keywords: Corporate tax; depreciation; imperfect loss offset; decreasing returns; cost of capital; uncertainty
    JEL: F23 G31 H25
    Date: 2006–06–02
  3. By: Raimondos-Møller, Pascalis (Department of Economics, Copenhagen Business School); Woodland, Alan D. (Department of Economics, Copenhagen Business School)
    Abstract: This paper introduces an index of tax optimality that measures the distance of some current tax structure from the optimal tax structure in the presence of public goods. In doing so, we derive a [0, 1] number that reveals immediately how far the current tax configuration is from the optimal one and, thereby, the degree of efficiency of a tax system. We call this number the Tax Optimality Index. We show how the basic method can be altered in order to derive a revenue equivalent uniform tax, which measures the size of the public sector. A numerical example is used to illustrate the method developed.
    Keywords: Tax optimality index; excess burden; distance function
    JEL: H21 H41
    Date: 2006–08–30

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