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Taxation and the User Cost of Capital: An Introduction

Publication Details

  • Taxation and the User Cost of Capital: An Introduction (WP 15/02)
  • Published: 10 Mar 2015
  • Status: Current
  • Authors: Creedy, John; Gemmell, Norman
  • Pages: (2),iv,35
  • ISBN: 978-0-478-43623-5 (Online)
  • Ref. No: WP 15/02
  • Pub. type: Working Papers
 

Taxation and the User Cost of Capital: An Introduction

Published 10 March 2015

Authors: John Creedy and Norman Gemmell

Abstract

The aim of this paper is to provide an introduction to the concept of user cost and its determinants. Particular attention is given to the influence of taxation. The concept of user cost relates to the rental, the rate of return to capital, that arises in a profit maximising situation in which further investment in capital produces no additional profit. This paper sets out in some detail the range of assumptions involved in obtaining alternative expressions for the user cost. The user cost refers to a before-tax capital rental, the rate of return that ensures that the(after-tax) cost of capital is equal to the post-tax returns over its life. Hence, associated with the user cost measure is an effective marginal tax rate. This can differ substantially from the statutory marginal rate applicable to the investor. A related effective average tax rate is also defined.

Contents

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Executive Summary

1 Introduction

2 User Cost: The Simplest Case

3 Allowing for Taxation

4 The After-Tax Real Interest Rate

5 The Effective Marginal Tax Rate

6 An Effective Average Tax Rate

7 Investment and the User Cost

8 Conclusions

Appendix A: Derivation of the Basic Hall and Jorgensen Result

Appendix B: Allowing for Uncertainty

Bibliography

twp15-02.pdf (662 KB) pp. (3),i-iv,1-36

Acknowledgements

We should like to thank Martin Keene, Helen Miller and Florian Misch for their comments on an earlier draft.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

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